Ireland is usually held up as a shining example of austerity in action by eurocrats and the Germans. The mainstream media repeats the “austerity is working in Ireland” meme frequently. Whenever a piece of news is released that runs counter to the narrative, it is summarily ignored. If Ireland sells a bond on its own, the news is reported throughout the financial press; yet, there is only one article that I could find that mentions the cratering Irish PMI.
Yesterday, the Irish Prime Minister discussed increasing spending with unbudgeted money rather than continuing to pay down debt. Now we know why he floated this idea. No matter what he says, the government understands that the Irish economy is weak and threatening to reenter recession.
This is what Mr. Griffin said:
As we’ve all learned over the years, if you reduce the cost of capital you increase your use of fixed assets and you take out jobs. Corporate America, seeing an ever increasing cost for its employee base and extraordinarily low interest rates, is taking every step it can possibly take to reduce employment, to build factories abroad and domestically to substitute technology and automated processes for people.
The theory makes sense. Corporations are using cheap money to cut expenses rather than expand production by hiring new workers. With flat demand, this is the best way to increase profits.
The chart above tends to lend support to this analysis, and this is exactly what the Cotillion Effect predicts. Cheap money has its greatest effect on those closest to it, in this case corporations.
Why are traders so nervous? The money printing won’t stop. They even release this handy chart to show everyone the details of the open market purchases so that traders may frontrun them and make lots of money for their TBTF banks.
Since 2008, whenever the Fed has threatened to take away the punch bowl, market swoons have resulted. If a reduction in purchases takes the market down, the Fed will increase money printing to sufficient quantities to keep it afloat. Whether this policy continues to inflate asset prices is the question, not whether the Fed will use it. Each successive round of money printing does less as detailed in the chart above.
In my opinion, there will be no attempt to change in policy until after the new Chairman takes over in 2014, because this will be a sensitive time for financial markets.
US Manufacturing is approaching stall speed, but the recovery meme will die hard. If you are a wealthy American, your investment portfolio, home and any collectibles you own have appreciated nicely in value due to central bank largesse. For the vast majority of Americans, their net worth is determined mostly by their earning power. Stagnant wages indicate that most of the country still finds itself in economic distress.
As we mentioned above, the Cotillion Effect predicts this. Cheap money helps those closest to the flow. Financial firms, corporations and the wealthy are doing nicely, but the worker continues to suffer.
I am not surprised that there is May Day rioting in Europe, but Taiwan’s inclusion in the mayhem surprised me. While the Europeans have a lot to riot about, the Taiwanese seem to be doing well for themselves. However, Taiwan is also undergoing budget cuts. Pension are being reduced to resolve the country’s fiscal problems. With a debt to GDP ratio of less than 50% and a budget deficit of less than 2% and shrinking, I wish the U.S. had these types of problems.
Nigel Farage predicted that Slovenia would require a bailout within three months prior to this news hitting the wire. All the ingredients are there. The country is mired in a recession complete with a banking crisis and sinking government finances. As long as its banks have to capacity to purchase more debt, then the country should avoid a bailout. The postponement of the bill sale does not bode well for this scenario.
This chart is current as of the end of 2012. Spain’s actual debt to GDP ratio is closing in on 90% as we speak. Adding in the contingent liabilities brings the number to over 110%. The existence of the OMT program and pliable banks continuing to purchase Spanish sovereign debt should keep the country afloat indefinitely, but eventually reality will set in. Who knows when.