Summer vacation is over and things are about to get very interesting in Europe. Most Americans don’t realize this, but much of Europe shuts down for the entire month of August. I wish we had something similar in the United States. But now millions of Europeans are returning from their extended family vacations and the fun is about to begin. During August economic conditions continued to degenerate in Europe, but I figured that it wouldn’t be until after August that the European debt crisis would take center stage once again. And as I wrote about last week, if there is going to be a financial panic, it typically happens in the fall. The stock market has seen quite a nice rally over the summer, and many investors are nervous that we could see a significant “correction” very soon. The month of September has been the absolute worst month for stock performanceover the past 50 years, and it has also been the absolute worst month for stock performance over the past 100 years as well. Of course that does not guarantee that anything is going to happen this year. But things in Europe continue to get worse. Unemployment rates are spiking, manufacturing activity is slowing down, housing prices are crashing and major financial institutions are failing. What is happening in Europe right now appears to be an even worse version of what happened to the United States back in 2008.
But most Americans aren’t too concerned about what is happening in Europe.
In fact, most Americans don’t believe that a European financial collapse would be much of a problem for us.
Well, just remember what happened back in 2008. When the U.S. financial system started coming apart at the seams it sparked a devastating worldwide recession which was felt in every corner of the globe.
If the European financial system implodes, the consequences could be even worse.
Europe has a larger population than the United States does.
Europe has a larger economy than the United States does.
Europe has a much, much larger banking system than the United States does.
If Europe experiences a financial collapse, the entire globe will feel the pain.
And considering how weak the U.S. economy already is, it would not take much to push us over the edge.
What is going on in Europe right now is a very, very big deal and people need to pay attention.
The following are 18 indications that Europe has become an economic black hole which is going to suck the life out of the global economy….
British people with homes in France were today warned that the property market is in ‘free fall’.
A combination of factors including the election of a tax-and-spend Socialist government means that prices are tumbling.
It means an end to the boom years, when thousands of Britons poured money into rental or retirement investments across the Channel.
#5 A slow-motion bank run is happening in Spain. The amount of money being pulled out of the Spanish banking system is absolutely unprecedented. The following is from a recent Zero Hedge article….
The central bank of Spain just released the net capital outflow numbers and they are disastrous. During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain. For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically. Reality is reality and Spain is experiencing a full-fledged run on its banks whether anyone in Europe wants to admit it or not.
If this pace keeps up, more than 600 billion dollars will be pulled out of Spanish banks by the end of the year.
Keep in mind that the GDP of Spain for all of 2011 was just 1.49 trillion dollars.
So by the end of this year we could see the equivalent of more than 40 percent of Spanish GDP pulled out of Spanish banks and sent out of the country.
In case you were wondering, yes, that is a nightmare scenario.
#7 The yield on 10 year Spanish bonds is up to 6.85 percent. This is an unsustainable level, and if rates don’t come down on Spanish debt soon it is inevitable that Spain will end up just like Greece.
#8 On Monday it was announced that Spanish banking giant Bankia will be getting an emergency “cash injection” of between 4 and 5 billion euros. Apparently “cash injection” sounds better to the politicians than “a bailout” does.
#9 The housing crash in Spain just continues to get worse. It is being reported that some homes in Spain are being sold at a 70% discountfrom where they were at the peak of the market back in 2006. At this point there are approximately 2 million unsold homes in Spain.
#10 There are persistent rumors that the government of Spain will soon be forced to officially ask for a bailout from the rest of Europe. But who is going to bail them out? Most of the other governments of the eurozone are on the verge of bankruptcy themselves.
#11 Manufacturing activity in Europe has contracted for 13 months in a row. The following is from a recent Reuters report….
The downturn that began in the smaller periphery members of the 17-nation bloc is now sweeping through Germany and France and the situation remained dire in the region’s third and fourth biggest economies of Italy and Spain.
“Larger nations like France and Germany remain in reverse gear… the (manufacturing) sector is on course to act as a drag on gross domestic product in the third quarter,” said Rob Dobson, senior economist at data collator Markit.
Markit’s final Purchasing Managers’ Index (PMI) for the manufacturing sector fell from an earlier flash reading of 45.3 to 45.1, above July’s three-year low of 44.0, but notching its 13th month below the 50 mark separating growth from contraction.
#12 Chinese exports to the EU declined by 16.2 percent in July. U.S. exports to Europe have been steadily falling as well.
#13 Slovenia and Cyprus are two other eurozone members that are in desperate need of bailout money. The dominoes just keep falling and nobody seems to be able to come up with a plan to “fix” Europe.
#14 Even the “strong” economies in Europe are being dragged down now. For example, unemployment in Germany has risen for five months in a row.
#15 According to one recent poll, only about one-fourth of all Germans want Greece to remain a part of the eurozone. The odds of a breakup of the euro seem to rise with each passing day.
#16 It is now estimated that bad loans make up approximately 20 percent of all domestic loans in the Greek banking system at this point.
#17 The suicide rate in Greece is more than 30 percent higher than it was last year. People are becoming very desperate in Greece and there is no end in sight to the economic depression that they are going through.
#18 Large U.S. companies have been rapidly getting prepared for a Greek exit from the eurozone. The following is from a recent New York Times article….
Even as Greece desperately tries to avoid defaulting on its debt, American companies are preparing for what was once unthinkable: that Greece could soon be forced to leave the euro zone.
Bank of America Merrill Lynch has looked into filling trucks with cash and sending them over the Greek border so clients can continue to pay local employees and suppliers in the event money is unavailable. Ford has configured its computer systems so they will be able to immediately handle a new Greek currency.
Every time European leaders get together they declare that they have “a plan” that will solve the problems that Europe is experiencing, but as we have seen things in Europe just continue to get worse with no end in sight.
A key date is coming up in the middle of this month. On September 12th, Germany’s Constitutional Court will determine the fate of the recent fiscal pact and the ESM. According to UniCredit global chief economist Erik Nielsen, if the court rules against the fiscal pact and the ESM the fallout will be catastrophic….
“If they were to surprise us by striking down Germany’s participation, I would think it’d be an utter bloodbath in markets”
But that is not the only thing that could set off a full-blown panic in the financial markets.
The truth is that Europe is teetering on the edge.
One wrong move and it is going to be 1929 all over again.
As I have maintained all along, the next wave of the economic collapse is rapidly approaching, and this time the epicenter for the crisis is going to be in Europe.
But that does not mean that things are going to be easier for the United States than last time. We have never even come close to recovering from the last recession. Most Americans families are just barely getting by. In fact, 77 percent of them are living paycheck to paycheck at least part of the time.
Right now there are millions of Americans that have lost their jobs and their homes in recent years and that feel forsaken by society.
After this next wave hits us there will be tens of millions of Americans feeling the pain of economic desperation.
The last wave of the economic collapse hurt us.
This next wave is going to absolutely devastate us.
Watch what is happening in Europe very carefully. What Greece, Spain, Italy and France are experiencing right now is going to hit us soon enough.
September 4, 2012 – EUROPE - A growing number of global and European health bodies are warning that the introduction and intensification of austerity measures has led to a sharp rise in mental health problems with suicide rates, alcohol abuse and requests for anti-depressants increasing as people struggle with the psychological cost of living through a European-wide recession. “No one should be surprised that factors such as unemployment, debt and relationship breakdowns can cause bouts of mental illness and may push people who are already vulnerable to take their own lives,” Richard Colwill, of the British mental health charity Sane, told CNBC. “There does appear to be a connection between unemployment rates and suicide for example,” he said, referring to a recent study in the British Medical Journal that stated that more than 1,000 people in the U.K. may have killed themselves because of the impacts of the recession. “This research reflects other work showing similar rises in suicides across Europe.” According to Josée Van Remoortel, advisor to the European organization Mental Health Europe (MHE), the financial crisis is affecting “all areas of life,” not just economies, and its impact on mental health is creating a “deep chasm in our society.” “The credit crunch [has] had one unexpected consequence and one that reflects a deep chasm in our society – a sharp rise in mental health problems, largely caused by uncertainty and fear for the future,” he writes in a paper entitled “The Sane Approach.” A recent survey of general practitioners (family doctors) in Britain by the Insight Research Group seems to support Van Remoortel’s view. The data showed that out of 300 family doctors surveyed, the majority reported that austerity was damaging their patients’ health. Seventy six percent said their patients were unhealthier due to the economic climate and 77 percent said more patients were seeking treatment for anxiety. The doctors surveyed relayed an increase in the incidence of alcohol abuse, anxiety, depression and requests for abortions due to economic reasons, anecdotal evidence borne out by statistics for anti-depressant requests in the U.K., which have risen 28 percent from 34 million prescriptions in 2007 to 43.4 million in 2011. Wolfgang Münchau told the Financial Times in July, the debt crisis in the Eurozone could likely last 20 years. -CNBC
German Intelligence Chief Gerhard Schindler has issued a warning saying that Europe is at great risk of terrorist attacks by Islamic extremists.
In a wide-ranging interview with the German newspaper Die Welt, Schindler said the German foreign intelligence agency, the Bundesnachrichtendienst (BND), is particularly concerned about the threat posed by homegrown terrorists, individuals who are either born or raised in Europe and who travel to war zones like Afghanistan, Pakistan, Somalia or Yemen to obtain training in terrorist methods.
Schindler said: “A particular threat stems from Al Qaeda structures in Yemen. They want to bring Jihad to Europe. Among other tactics, this involves the ‘lone wolf’ model, which involves individuals who are citizens of the targeted country and who go abroad for training. We know that this is strategy is currently high on Al Qaeda’s agenda, and we are accordingly attentive.”
Schindler’s comments came just days after Spanish authorities arrested three suspected al Qaeda terrorists who were allegedly plotting an airborne attack on a shopping mall near Gibraltar, the British overseas territory on the southernmost tip of Spain.
Schindler’s warning also comes amid the backdrop of a high-security court trial of four suspected Al Qaeda members which began in the German city of Düsseldorf on July 25. German public prosecutors say the defendants — three home grown Islamists born in the German state of North Rhine-Westphalia and one Moroccan national — were planning to stage a “sensational terror attack” in Germany.
Also known as the “Düsseldorfer Cell,” the defendants are also accused of plotting to assassinate the former commander of German Special Forces (KSK Kommando Spezialkräfte) as well as to attack the US Army base in the Bavarian town of Grafenwöhr.
German authorities began monitoring the group in early 2010, when the American Central Intelligence Agency alerted German police to the fact that the Moroccan, Abdeladim el-Kebir, 31, had entered Germany after having been trained at an Al Qaeda camp in Waziristan along the Afghanistan-Pakistan border in 2010.
German public prosecutors say El-Kebir, also known as Abi al-Barra, was the ringleader of the Düsseldorfer Cell and, following orders from an unidentified senior Al-Qaeda operative, in November 2010 began working on a plot to blow up public buildings, train stations and airports in Germany. After several months of surveillance by German police, El-Kebir was arrested in April 2011.
Before his arrest, El-Kebir also recruited three accomplices he knew from his student days in the German city of Bochum: a 32-year-old German-Moroccan named Jamil Seddiki, a 21-year-old German-Iranian named Amid Chaabi, and a 28-year-old German named citizen Halil Simsek. The three were arrested in Germany in December 2011.
Prosecutors say that Seddiki was in charge of producing explosives while Chaabi and Simsek were responsible for communications with the al Qaeda leadership.
During testimony in court, it emerged that all four defendants led inconspicuous lives. Simsek, for example, who was born in the German city of Gelsenkirchen, earned a degree in mechanical engineering from the University of Bochum.
He had wanted to become a German police officer but his application was rejected for medical reasons. Chaabi, who was born in Bochum, was studying Information Technology at the University of Hagen when he was arrested. Seddiki, a high school graduate, was working as an electrician.
Prosecutors have compiled 260 ring-binders containing evidence gathered by investigators; the prosecutor’s arraignment runs to 500 pages. The main accusation against the men is that they set up a terrorist cell and prepared to commit murder.
Federal Prosecutor Michael Bruns told the court that the defendants “planned to carry out a spectacular and startling attack” in Germany and that the defendants “wanted to spread fear and horror.”
The trial is expected to run for 30 days; a verdict is expected in November. If the four accused men are found guilty, they face up to ten years in prison.
(In November 2011, a federal court in Brooklyn, New York indicted el-Kebir on charges of conspiring to provide Al-Qaeda with explosives and training. If extradited and convicted, el-Kebir faces a maximum sentence of life imprisonment.)
Underscoring German officialdom’s anxiety over home grown Islamic terrorism, the German state of Lower Saxony recently published a practical guide to extremist Islam to help citizens identify tell-tale signs of Muslims who are becoming radicalized.
Security officials said the objective of the document is to mitigate the threat of home-grown terrorist attacks by educating Germans about radical Islam and encouraging them to refer suspected Islamic extremists to the authorities — a move that reflects mounting concern in Germany over the growing assertiveness of Salafist Muslims, who openly state that they want to establish Islamic Sharia law in the country and across Europe.
The 54-page document, “Radicalization Processes in the Context of Islamic Extremism and Terrorism,” which provides countless details about the Islamist scene in Germany, paints a worrisome picture of the threat of radical Islam there.
According to the report, German security agencies estimate that approximately 1,140 individuals living in Germany pose a high risk of becoming Islamic terrorists. The document also states that up to 100,000 native Germans have converted to Islam in recent years, and that “intelligence analysis has found that converts are especially susceptible to radicalization…Security officials believe that converts comprise between five to ten percent of the Salafists.
August 17, 2012 – BERLIN – The German military will in future be able to use its weapons on German streets in an extreme situation, the Federal Constitutional Court says. The ruling says the armed forces can be deployed only if Germany faces an assault of “catastrophic proportions,” but not to control demonstrations. The decision to deploy forces must be approved by the federal government. Severe restrictions on military deployments were set down in the German constitution after Nazi-era abuses. The court says the military still cannot shoot down a hijacked passenger plane – fighter jets would have to intercept the plane and fire warning shots to force it to land. After World War II the new constitution ruled that soldiers could not be deployed with guns at the ready on German soil, the BBC’s Stephen Evans reports from Berlin. The court has now changed that, saying troops could be used to tackle an assault that threatens scores of casualties. The judges had in mind a terrorist incident involving armed attackers in public places. German troops have been deployed abroad since the war, but it has been a gradual process. German warplanes have been used in the Balkans and troops are on the ground in Afghanistan, protecting construction workers, but able to return fire if attacked. –BBC
By George Friedman
Louis M. Bacon is the head of Moore Capital Management, one of the largest and most influential hedge funds in the world. Last week, he announced that he was returning one quarter of his largest fund, about $2 billion, to his investors. The reason he gave to The New York Times was that he had found it difficult to invest given the impossibility of predicting the European situation. He was quoted as saying, “The political involvement is so extreme — we have not seen this since the postwar era. What they are doing is trying to thwart natural market outcomes. It is amazing how important the decision-making of one person, Angela Merkel, has become to world markets.”
The purpose of hedge funds is to make money, and what Bacon essentially said was that it is impossible to make money when there is heavy political involvement, because political involvement introduces unpredictability in the market. Therefore, prudent investment becomes impossible. Hedge funds have become critical to global capital allocation because their actions influence other important actors, and their unwillingness to invest and trade has significant implications for capital availability. If others follow Moore Capital’s lead, as they will, there will be greater difficulty in raising the capital needed to address the problem of Europe.
But more interesting is the reasoning. In Bacon’s remarks, there is the idea that political decisions are unpredictable, or less predictable than economic decisions. Instead of seeing German Chancellor Merkel as a prisoner of non-market forces that constrain her actions, conventional investors seem to feel that Europe is now subject to Merkel’s whims. I would argue that political decisions are predictable and that Merkel is not making decisions as much as reflecting the impersonal forces that drive her. If you understand those impersonal forces, it is possible to predict political behaviors, as you can market behaviors. Neither is an exact science, but properly done, neither is impossible.
In order to do this, you must begin with two insights. The first is that politics and the markets always interact. The very foundation of the market — the limited liability corporation — is political. What many take as natural is actually a political contrivance that allows investors to limit their liability. The manner in which liability is limited is a legal issue, not a market issue, and is designed by politicians. The structure of risk in modern society revolves around the corporation, and the corporation is an artifice of politics along with risk. There is nothing natural about a nation’s corporate laws, and it is those corporate laws that define the markets.
There are times when politics leave such laws unchanged and times when politics intrude. The last generation has been a unique time in which the prosperity of the markets allowed the legal structure to remain generally unchanged. After 2008, that stability was no longer possible. But active political involvement in the markets is actually the norm, not the exception. Contemporary investors have taken a dramatic exception — the last generation — and lacking a historical sense have mistaken it for the norm. This explains the inability of contemporary investors to cope with things that prior generations constantly faced.
The second insight is the recognition that thinkers such as Adam Smith and David Ricardo, who modern investors so admire, understood this perfectly. They never used the term “economics” by itself, but only in conjunction with politics; they called it political economy. The term “economy” didn’t stand by itself until the 1880s when a group called the Marginalists sought to mathematize economics and cast it free from politics as a stand-alone social science discipline. The quantification of economics and finance led to a belief — never held by men like Smith — that there was an independent sphere of economics where politics didn’t intrude and that mathematics allowed markets to be predictable, if only politics wouldn’t interfere.
Given that politics and economics could never be separated, the mathematics were never quite as predictive as one would have thought. The hyper-quantification of market analysis, oblivious to overriding political considerations, exacerbated market swings. Economists and financiers focused on the numbers instead of the political consequences of the numbers and the political redefinitions of the rules of corporate actors, which the political system had invented in the first place.
The world is not unpredictable, and neither is Europe nor Germany. The matter at hand is neither what politicians say they want to do nor what they secretly wish to do. Indeed, it is not in understanding what they will do. Rather, the key to predicting the political process is understanding constraints — the things they can’t do. Investors’ view that markets are made unpredictable by politics misses two points. First, there has not been a market independent of politics since the corporation was invented. Second, politics and economics are both human endeavors, and both therefore have a degree of predictability.
The European Union was created for political reasons. Economic considerations were a means to an end, and that end was to stop the wars that had torn Europe apart in the first half of the 20th century. The key was linking Germany and France in an unbreakable alliance based on the promise of economic prosperity. Anyone who doesn’t understand the political origins of the European Union and focuses only on its economic intent fails to understand how it works and can be taken by surprise by the actions of its politicians.
Postwar Europe evolved with Germany resuming its prewar role as a massive exporting power. For the Germans, the early versions of European unification became the foundation to the solution of the German problem, which was that Germany’s productive capacity outstripped its ability to consume. Germany had to export in order to sustain its economy, and any barriers to free trade threatened German interests. The creation of a free trade zone in Europe was the fundamental imperative, and the more nations that free trade zone encompassed, the more markets were available to Germany. Therefore, Germany was aggressive in expanding the free trade zone.
Germany was also a great supporter of Europewide standards in areas such as employment policy, environmental policy and so on. These policies protect larger German companies, which are able to absorb the costs, from entrepreneurial competition from the rest of Europe. Raising the cost of entry into the marketplace was an important part of Germany’s strategy.
Finally, Germany was a champion of the euro, a single currency controlled by a single bank over which Germany had influence in proportion to its importance. The single currency, with its focus on avoiding inflation, protected German creditors against European countries inflating their way out of debt. The debt was denominated in euros, the European Central Bank controlled the value of the euro, and European countries inside and outside the eurozone were trapped in this monetary policy.
So long as there was prosperity, the underlying problems of the system were hidden. But the 2008 crisis revealed the problems. First, most European countries had significant negative balances of trade with Germany. Second, European monetary policy focused on protecting the interests of Germany and, to a lesser extent, France. The regulatory regime created systemic rigidity, which protected existing large corporations.
Merkel’s policy under these circumstances was imposed on her by reality. Germany was utterly dependent on its exports, and its exports in Europe were critical. She had to make certain that the free trade zone remained intact. Secondarily, she had to minimize the cost to Germany of stabilizing the system by shifting it onto other countries. She also had to convince her countrymen that the crisis was due to profligate Southern Europeans and that she would not permit them to take advantage of Germans. The truth was that the crisis was caused by Germany’s using the trading system to flood markets with its goods, its limiting competition through regulations, and that for every euro carelessly borrowed, a euro was carelessly lent. Like a good politician, Merkel created the myth of the crafty Greek fooling the trusting Deutsche Bank examiner.
The rhetoric notwithstanding, Merkel’s decision-making was clear. First, under no circumstances could she permit any country to leave the free trade zone of the European Union. Once that began she could not predict where it would end, save that it might end in German catastrophe. Second, for economic and political reasons she had to be as aggressive as possible with defaulting borrowers. But she could never be so aggressive as to cause them to decide that default and withdrawal made more sense than remaining in the system.
Merkel was not making decisions; she was acting out a script that had been written into the structure of the European Union and the German economy. Merkel would create crises that would shore up her domestic position, posture for the best conceivable deal without forcing withdrawal, and in the end either craft a deal that was not enforced or simply capitulate, putting the problem off until the next meeting of whatever group.
In the end, the Germans would have to absorb the cost of the crisis. Merkel, of course, knew that. She attempted to extract a new European structure in return for Germany’s inevitable capitulation to Europe. Merkel understood that Europe, and one of the foundations of European prosperity, was cracking. Her solution was to propose a new structure in which European countries accepted Brussels’ oversight of their domestic budgets as part of a systemic solution by the Germans. Some countries outright rejected this proposal, while others agreed, knowing it would never be implemented. Merkel’s attempt to recoup by creating an even more powerful European apparatus was bound to fail for two reasons. First and most important, giving up sovereignty is not something nations do easily — especially not European nations and not to what was effectively a German structure. Second, the rest of Europe knew that it didn’t have to give in because in the end Germany would either underwrite the solution (by far the most likely outcome) or the free trade zone would shatter.
If we understand the obvious, then Merkel’s actions were completely understandable. Germany needed the European Union more than any other country because of its trade dependency. Germany could not allow the union to devolve into disconnected nations. Therefore, Germany would constantly bluff and back off. The entire Greek drama was the exemplar of this. It was Merkel who was trapped and, being trapped, she was predictable.
The euro question was interesting because it intersected the banking system. But in focusing on the euro, investors failed to understand that it was a secondary issue. The European Union was a political institution and European unity came first. The lenders were far more concerned about the fate of their loans than the borrowers were. And whatever the shadow play of the European Central Bank, they would wind up doing the least they could do to avert default — but they would avert default. The euro might have been what investors traded, but it was not what the game was about. The game was about the free trade zone and Franco-German unity. Merkel was not making decisions based on the euro, but on other more pressing considerations.
The investors’ problem is that they mistake the period between 1991 and 2008 as the norm and keep waiting for it to return. I saw it as a freakish period that could survive only until the next major financial crisis — and there always is one. While the unusual period was under way, political and trade issues subsided under the balm of prosperity. During that time, the internal cycles and shifts of the European financial system operated with minimal external turbulence, and for those schooled in profiting from these financial eddies, it was a good time to trade.
Once the 2008 crisis hit external factors that were always there but quiescent became more overt. The internal workings of the financial system became dependent on external forces. We were in the world of political economy, and the political became like a tidal wave, making the trading cycles and opportunities that traders depended on since 1991 irrelevant. And so, having lost money in 2008, they could never find their footing again. They now lived in a world where Merkel was more important than a sharp trader.
Actually, Merkel was not more important than the trader. They were both trapped within constraints about which they could do nothing. But if those constraints were understood, Merkel’s behavior could be predicted. The real problem for the hedge funds was not that they didn’t understand what they were doing, but the manner in which they had traded in the past simply no longer worked. Even understanding and predicting what political leaders will do is of no value if you insist on a trading model built for a world that no longer exists.
What is called high velocity trading, constantly trading on the infinitesimal movements of a calm but predictable environment, doesn’t work during a political tidal wave. And investors of the last generation do not know how to trade in a tidal wave. When we recall the two world wars and the Cold War, we see that this was the norm for the century and that fortunes were made. But the latest generation of investors wants to control risk rather than take advantage of new realities.
However we feel about the performance of the financial community since 2007, there must be a system of capital allocation. That can be operated by the state, but there is empirical evidence that the state isn’t very good at making investment decisions. But then, the performance of the financial community has been equally unacceptable, with more than its share of mendacity to boot. The argument for private capital allocation may be theoretically powerful, but the fact is that the empirical validation of the private model hasn’t been there for several years.
A strong argument can be made — corruption and stupidity aside — that the real problem has been a failure of imagination. We have re-entered an era in which political factors will dominate economic decisions. This has been the norm for a very long time, and traders who wait for the old era to return will be disappointed. Politics can be predicted if you understand the constraints under which a politician such as Merkel acts and don’t believe that it is simply random decisions. But to do that, you have to return to Adam Smith and recall the title of his greatest work, The Wealth of Nations. Note that Smith was writing about nations, about politics and economics — about political economy.
Are we rapidly approaching a moment of reckoning for the global financial system? August is likely to be a relatively slow month as most of Europe is on vacation, but after that we will be moving into a “danger zone” where just about anything could happen. Historically, a financial crisis has been more likely to happen in the fall than during any other time, and this fall is shaping up to be a doozy. Much of the focus of the financial world is on whether or not the euro is going to break up, but even if the authorities in Europe are able to keep the euro together we are still facing massive problems. Countries such as Greece and Spain are already experiencing depression-like conditions, and much of the rest of the globe is sliding into recession. Unemployment has already risen to record levels in some parts of Europe, major banks all over Europe are teetering on the brink of insolvency, and the flow of credit is freezing up all over the planet. If things take a really bad turn, this crisis could become much worse than the financial crisis of 2008 very quickly.
All over the world people are starting to write about the possibility of a major economic crisis starting this fall.
For example, a recent article in the International Business Timesdiscussed how some economists around the globe are fearing the worst for the coming months….
The consensus? The world economy has entered a final countdown with three months left, and investors should pencil in a collapse in either August or September.
Citing a theory he has been espousing since 2010 that predicts “a future lack of policy flexibility from the monetary and fiscal side,” Jim Reid, a strategist at Deutsche Bank, wrote a note Tuesday that gloated “it feels like Europe has proved us right.”
“The U.S. has the ability to disprove the universal nature of our theory,” Reid wrote, but “if this U.S. cycle is of completely average length as seen using the last 158 years of history (33 cycles), then the next recession should start by the end of August.”
The global financial system is so complex and there are so many thousands of moving parts that it is always difficult to put an exact date on anything. In fact, history is littered with economists that have ended up looking rather foolish by putting a particular date on a prediction.
But without a doubt we are starting to see storm clouds gather for this fall.
The following are 11 more signs that time is quickly running out for the global financial system….
#1 A number of very important events regarding the financial future of Europe are going to happen in the month of September. The following is from a recent Reuters article that detailed many of the key things that are currently slated to occur during that month….
In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.
On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy – or what do if one or both were to topple.
#2 Reuters is reporting that Spanish Economy Minister Luis de Guindos has suggested that Spain may need a 300 billion euro bailout.
#4 The unemployment rate in Spain is now up to 24.6 percent.
#5 According to the Wall Street Journal, a new 30 billion euro hole has been discovered in the financial rescue plan for Greece.
#8 German Finance Minister Wolfgang Schäuble says that the rest of Europe will not be making any more concessions for Greece.
#10 The Dallas Fed index of general business activity fell dramatically to -13.2 in July. This was a huge surprise and it is yet another indication that the U.S. economy is rapidly heading into a recession.
#11 As I have written about previously, a banking crisis is more likely to happen in the fall than at any other time during the year. The global financial system will enter a “danger zone” starting in September, and none of us need to be reminded that the crashes of 1929, 1987 and 2008 all happened during the second half of the year.
So is there any hope on the horizon?
European leaders have tried short-term solution after short-term solution and none of them have worked.
Now countries all over Europe are sliding into depression and the authorities in Europe seem to be all out of answers. The following is what one eurozone diplomat said recently….
“For two years we’ve been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak,” the diplomat said. “But now the leak has got so big that we can’t pump air into the raft quickly enough to keep it afloat.”
The boat is filling up with water faster than they can bail it out.
So what is the solution?
Well, some of the top names in economics on both sides of the Atlantic are urging authorities to keep the debt bubble pumped up by printing lots and lots more money.
For example, even though the U.S. government is already running trillion dollar deficits New York Times “economist” Paul Krugman is boldly proclaiming that now is the time to print and borrow even more money. He is proud to be a Keynesian, and he says that “you should be a Keynesian, too.“
Needless to say, I will be advocating 1933 monetary stimulus à l’outrance, or trillions of asset purchases through old fashioned open-market operations through the quantity of money effect (NOT INTEREST RATE ‘CREDITISM’) to avert deflation – and continue doing so until nominal GDP is restored to its trend line, at which point the stimulus can be withdrawn again.
But is more money and more debt really the solution to anything?
In the United States, M2 recent surpassed the 10 trillion dollar markfor the first time ever. It has increased in size by more than 5 times over the past 30 years.
Unfortunately, our debt has been growing much faster than GDP has over that time period.
Our problem is not that there is not enough money floating around.
Our problem is that there is way, way too much debt.
But this is how things always go with fiat currencies.
There is always the temptation to print more.
That is one of the big reasons why every single fiat currency in history has eventually collapsed.
Printing more money will not solve our problems. It will just cause our problems to take a different form.
In the end, nothing that the authorities can do will be able to avert the crisis that is coming.
A lot of people are starting to realize this, and that is one reason why we are seeing so much economic pessimism right now.
For example, according to a new Rasmussen poll only 14 percent of all Americans believe that children in America today will be “better off” than their parents.
That is an absolutely stunning figure, but it just shows us where we are at.
Our economy has been in decline for a long time, and now we are rapidly approaching another major downturn.
You better buckle up, because this downturn is not going to be pleasant at all.
The financial chess game in Europe is still being played out, but in the end it is going to boil down to one very fundamental decision. Is Germany going to allow the ECB to print up trillions of euros and use those euros to buy up the sovereign debt of troubled eurozone members such as Spain and Italy or not? Nothing short of this is going to solve the problems in Europe. You can forget the ESM and the EFSF. Anyone that thinks they are going to solve the problems in Europe is someone that would also take a water pistol to fight a raging wildfire. No, the only thing that is going to keep Spain and Italy from collapsing under the weight of a mountain of debt is a financial nuke. The ECB needs to have the power to print up trillions of euros and use that money to buy up massive amounts of sovereign debt in order to guarantee that Spain and Italy will be able to borrow lots more money at very low interest rates. In fact, this is probably what European Central Bank President Mario Draghi has in mind when he says that he is going to “do whatever it takes to preserve the euro”. However, there is one giant problem. The ECB is not going to be able to do this unless Germany allows them to. And after enduring the horror of hyperinflation under the Weimar Republic, Germany is not too keen on introducing trillions upon trillions of new euros into the European economy. If Germany allows the ECB to go down this path, Germany will end up experiencing tremendous inflation and the only benefit for Germany will be that the eurozone was kept together. That doesn’t sound like a very good deal for Germany.
Those are unsustainable levels.
The only thing that is going to bring those bond yields down permanently to where they need to be is unlimited ECB intervention.
But that is not going to happen without German permission.
Meanwhile, the situation in Spain gets worse by the day.
An article in Der Spiegel recently described the slow motion bank run that is systematically ripping the Spanish banking system to shreds….
Capital outflows from Spain more than quadrupled in May to €41.3 billion ($50.7 billion) compared with May 2011, according to figures released on Tuesday by the Spanish central bank.
In the first five months of 2012, a total of €163 billion left the country, the figures indicate. During the same period a year earlier, Spain recorded a net inflow of €14.6 billion.
If those numbers sound really bad to you, that is because they are really bad.
At this point, authorities in Spain are starting to panic. According to Graham Summers, Spain has imposed the following new capital restrictions during the last month alone….
- A minimum fine of €10,000 for taxpayers who do not report their foreign accounts.
- Secondary fines of €5,000 for each additional account
- No cash transactions greater than €2,500
- Cash transaction restrictions apply to individuals and businesses
How would you feel if the U.S. government permanently banned all cash transactions greater than $2,500?
That is how crazy things have already become in Spain.
We should see the government of Spain formally ask for a bailout pretty soon here.
Italy should follow fairly quickly thereafter.
But right now there is not enough money to completely bail either one of them out.
In the end, either the ECB is going to do it or it is not going to get done.
A moment of truth is rapidly approaching for Europe, and nobody is quite sure what is going to happen next. According to the Wall Street Journal, the central banks of the world are on “red alert” at this point….
Ben Bernanke and Mario Draghi, with words but not yet actions, demonstrated this week that they are on red alert about the global economy.
Expectations are now high that Mr. Bernanke’s Federal Reserve and Mr. Draghi’s European Central Bank will act soon to address those worries. But both face immense tactical and political challenges and neither has a handbook to follow.
So what happens if Germany does not allow the ECB to print up trillions of new euros?
Financial journalist Ambrose Evans-Pritchard recently described what is at stake in all of this….
Failure to halt a full-blown debt debacle in Spain and Italy at this delicate juncture – with China, India and Brazil by now in the grip of a broken credit cycle and the US on the cusp of fresh recession even before the “fiscal cliff” hits – would tip the entire global system into a downward spin, triggering the sort of feedback loop that caused such havoc in late 2008.
As I have written about so frequently, time is running out for the global financial system.
Even Germany is starting to feel the pain. This week we learned that unemployment in Germany has risen for four months in a row.
So what comes next?
There is actually a key date that is coming up in September. The Federal Constitutional Court in Germany will rule on the legality of German participation in the European Stability Mechanism on September 12th.
If it is ruled that Germany cannot participate in the European Stability Mechanism then that is going to create all sorts of chaos. At that point all future European bailouts would be called into question and many would start counting down the days to the break up of the entire eurozone.
If Germany did end up leaving the eurozone, the transition would not be as difficult as many may think.
For example, most Americans may not realize this but Deutsche Marks are currently accepted at many retail stores throughout Germany. The following comes from a recent Wall Street Journal article….
Shopping for pain reliever here on a recent sunny morning, Ulrike Berger giddily counted her coins and approached the pharmacy counter. She had just enough to make the purchase: 31.09 deutsche marks.
“They just feel nice to hold again,” the 55-year-old preschool teacher marveled, cupping the grubby coins fished from the crevices of her castaway living room sofa. “And they’re still worth something.”
Behind the counter of Rolf-Dieter Schaetzle’s pharmacy in this southern German village lay a tray full of deutsche mark notes and coins—a month’s worth of sales.
I have a feeling that it would be much easier for Germany to leave the euro than it would be for most other eurozone members to.
The months ahead are certainly going to be very interesting, that is for sure.
Europe is heading for a date with destiny, and what transpires in Europe is going to shake the rest of the globe.
Sadly, most Americans still aren’t too concerned with what is going on in Europe right now.
Well, if you still don’t think that the problems in Europe are going to affect the United States, just check this news item from the Guardian….
General Motors’ profits fell 41% in the second quarter as troubles in Europe undercut strong sales in North America.
America’s largest automaker made $1.5bn in the second quarter of 2012, compared with $2.5bn for the same period last year. Revenue fell to $37.6bn from $39.4bn in the second quarter of 2011. The results exceeded analysts’ estimates, but further underlined Europe’s drag on the US economy.
Profits at General Motors are down 41 percent and Europe is being blamed.
The global economy is more tightly integrated than ever before, and there is no way that the financial system of Europe collapses without it taking down the United States as well.
And considering the fact that the U.S. economy has already been steadily collapsing, the last thing we need is for Europe to come along and take our legs out from underneath us.
So what do all of you think about the problems in Europe?
Do you see any possible solution?
Please feel free to post a comment with your thoughts below….