Around the Globe 06.04.2013

An Austerity Success Story in Slovenia – Bloomberg.

Slovenia GDP Performance through 2013

Slovenia Debt to GDP

The article is entitled, “An Austerity Success Story in Slovenia.”  Examine the charts above and tell me where we may find the success.  GDP is cratering amidst skyrocketing government debt and unemployment and will continue to do so as long as Slovenia is shackled to the uncompetitive euro.

The only cure for the Euroflu is strong, sustained economic growth.  Since a painful internal devaluation will not be sufficient to stoke growth, the quickest way for Slovenia to return to health is for it to revert to its old national currency.  That would be success.  Anything else is just talk.

Gross Says Reduce Risk Assets Since QE Not Boosting Growth – Bloomberg.

Pimco’s Gross Skewers Bernanke: You’re Part of the Problem.

Fed Balance Sheet Projection 2014

I concur with Mr. Gross that the Fed is the problem here, but allow me to add a reason to his list.  Cheap money is allowing those who made bad investment decisions to stay in the game rather than liquidating.  Hence, unproductive assets are not changing hands.

Liquidation is a natural part of the creative destruction process.  When an investor can no longer finance a bad decision, he liquidates, and someone who wishes to put the asset to productive use gets it at a bargain.

For example, Mr. Red buys an office building but is unable to charge enough rent to cover financing, so he sells it at a loss.  Mr. Blue buys the building on the cheap and invests money in it to refurbish it and hire a maintenance staff.  In this scenario, economic growth is happening.

What the Fed has done is lower Mr. Red’s financing costs so that he does not have to sell to another investor who may extract more benefits from the assets adding to the country’s GDP.  Stagnation is the price we pay for inflated asset prices.

Stock Gains ‘Well Supported’ by U.S. Earnings: Chart of the Day – Bloomberg.

SPX to US Corporate Profits

The mainstream media really wants you to buy stocks.  A cursory inspection reveals that stocks appear historically cheap when compared to other eras, but one key piece of information is missing.  Interest rates are much lower today than they were in 2008.  As such, the index to profit ratio for 1Q2013, or the return, much be discounted with this in mind.

Rates (US 10 yr note) are roughly half what they were in 2008.  Adjusting for interest rates, we double today’s ratio to $2bn.   As the chart above reveals, the stock market is once again at bubblicious, historical highs courtesy of Uncle Ben and his magic money machine.

Europe’s Black Market Economy Is Booming.

Greek Government Revenues

Tax increases never work as planned due to the black market.  Higher tax rates force economic activity underground.  Greece has increased rates and created brand new taxes since 2010 in an attempt to raise extra revenue to deal with its debt crisis.  As the chart above indicates, tax collections have actually fallen in response.

What high taxes do is make economic activity at the margins unprofitable.  This dynamic forces participants to make a choice.  They can either cease the activity or move it to the black market where it remains profitable.  Fortunately for Europe, those people are choosing the black market so they can continue to feed, house and clothe their families.

Reckoning Nears for Detroit –

Detroit Population

Detroit problem is simple to identify.  In 1950, the city was home to almost 2 million people, but now its population is a little over 700,000.  A small city is supporting the infrastructure and legacy costs of a much large one.

Cities become depopulated all the time as one learns from visiting ruins scattered throughout Europe.  In ancient times, there were no civil servant pensions to worry about.  Since Detroit cannot afford to pay all of its legacy costs, it won’t.  Bondholders and pensioners will lose money from the inevitable Detroit bankruptcy no matter what laws are on the books.

2 thoughts on “Around the Globe 06.04.2013

  1. ” Liquidation is a natural part of the creative destruction process. When an investor can no longer finance a bad decision, he liquidates, and someone who wishes to put the asset to productive use gets it at a bargain. ”

    Yes good point, another way to say it, bankruptcy clears the bad bits from the good,
    the good are sold off, and then permitted to expand via investment to even better bits.
    The bad bits are gone and no longer hold you back.

    Mish has another good point.

    Cheap Money makes it easy for the corporation to invest in robotics and
    other technology to reduce the need for employment. Cheap money means
    capital investment over employee investment. Add in Obamacare, and who wants
    to hire an employee. Add in Unions and knowing you may not be able to get rid
    of an employee if you do hire one (see Europe)

    Bernakes program is killing the employment that he claims to seek to save.


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