2012-2010 Archives – Prior Archives
Friday June 1st, 2012
By Lou Barnes
Tough day. The details will be media-inescapable; work on context instead.
US job data for May were poor, and April’s revised so. However, jobs are growing, incomes are rising (a paltry 0.2% monthly, but rising), and the NAPM for May arrived 53.5, a little off from April’s 10-month high but a healthy distance above 50 breakeven.
The US concern is delicate: until this newest data there had been good reason to hope that the US locomotive could begin to pull the world; now the chance has risen that global drag may stall us, too. Take heart: that’s a risk, far from a done deal.
The global picture and financial flows have been widely mis described — partly from ignorance, partly confusion, partly salespeople trying to rile their herds, and everybody trying to jam a genuinely new situation into old models and experience.
Since the dawn of central banking 135 years ago, the fundamental prescription during an economic meltdown and bank run has been to flood the economy with cash and government guarantees. Since 2007 we have suffered serial bank-on-bank “wholesale” runs, but all-ee same-ee.
The global monetary system has worked to perfection: clearing transactions and currencies, central banks smoothing panic after panic. And those central banks have also deployed the most basic medicine for recovery: knock interest rates to the floor, and promise to keep them there. Low rates stimulate economies, and over time convince investors that holding cash is stupid, and instead to take risk.
All of that is out the window now. Today.
Begin at the beginning: the cash in your wallet is an IOU from a government, and the IOU is as good as that government’s tax revenue versus expenditure over time. “Hard” backing for paper “fiat” currencies — metal, sea shells, whatever — is a primitive and failed means to keep government IOU-issuance under control. The painful and unresolved reality: it is up to us. Nearly all Western democracies began by the 1960s to borrow instead of resolving fiscal disagreement, and gradually lost their safety margin of revenue versus debt service.
There was no telling who or what accident would snap an over-stretched system, and it has turned out to be the misbegotten euro. This week we see the endgame of meltdown-fighting. The ECB has injected several trillion euros into the European banking system — which is still open, no domino closings — but the cash has run through the 17-nation euro zone like grass through a goose. To escape repayment of IOUs in new lira, peseta, and francs, euro out-runners have today bid the German 2-year to a negative yield, hoping for repayment in deutschmarks; and to US 10s not as an investment at 1.46% today, but a liquid place of safety; and to bonds and banks of Denmark, Norway, Sweden, the UK… anywhere to get out of the lunatic asylum.
The hard money boys have told us forever that the result of ECB liquidity would be inflation, and exactly the opposite is happening, inflation falling throughout Europe. Zero-percent interest rates that were to drive investors from cash have been unable to stop a stampede to cash. Cries for government guarantees, Germany or somebody, or for more government spending — desperate to continue the failed 50-year game — cannot comprehend the result of faith lost in revenue adequate to pay bills.
The euro is toast, no solution but to break up and let local currencies find levels allowing growth. A fantastic destruction of wealth is underway, inevitable, and social stability at risk. Elsewhere… embrace the lesson! Do not waste Europe’s disaster.
Here, and in China, and in the emerging world we still have time. All face the same chore: focus, pull together, and restructure away from any impediment to economic growth. Drop every cherished notion from China’s state industries to India’s “license Raj” to US regulatory paralysis (all remarkably close cousins). If it’s not productive, drop it — no more “A small price to pay for protecting ____.” Bust up profiteering cartels like health care and higher education. Live within our means, and be competitive in the world, or be Europe.
The last year of US 10-year T-note trading…
And week…
