The IMF states, “Spain’s economic problems could tempt its banks to cut lending further…” to start this piece. The IMF is a day late and quite a few euros short in its assessment. Spanish banks are furiously cutting lending to the private sector and will continue to do so for the immediate future.
This is not to say that loans are decreasing. If one accounts for the loans to the government via sovereign bond purchases, then lending is flat or even up slightly. Private loans are discounted more than sovereign bond holdings both for purposes of calculating capital and cheap ECB loans because the rules assume that government obligations are the safest. We know better, because we know what happens when you AssUMe.
Since the underlying structure of the system is fueling this dynamic, banks will persist in replacing private loans with sovereign bonds. Spain’s economy, robbed of capital, will remain in depression.
Rajoy is a greedy and corrupt politician who has accepted illegal payments from his party’s slush fund, but he will not resign. Why should he? The fellow members of his party are just as corrupt as he is, so they will not call for his resignation.
That leaves the opposition to apply pressure, but they will not. The Socialists have neither the votes to sustain a no-confidence measure, nor do they have a viable candidate to replace Rajoy. In fact, the opposition would surely lose votes to a variety of smaller parties if new elections were held, so they cannot improve their position.
Spain is destined to spend time in political limbo with a government that lacks the moral authority to implement more reforms. This is nothing to fret about, because Italy has not had a functioning government for months. As long as bond yields remain low, no one cares.
Add June’s retail sales figures to the parade of tepid economic indicators. June’s employment numbers revealed a stagnating if not contracting economy, and the retail sales figures confirm this trend. The circle of truth reveals three months of tepid growth, one month of high growth and two month of contraction. The “recovery” lingers on.
The official Chinese GDP numbers are a fiction. By monitoring the inputs and outputs of the economy, savvy economists are able to impute a different growth level for China:
It’s not growing in the sevens. It’s probably growing in the threes and the fours,” Gordon Chang said in a “Squawk Box” interview. “When you look at electricity statistics, manufacturing surveys, price indices, trade data, all of this is looking very, very bad.
China is in the midst of a burgeoning economic crisis. This will metastasize to a full-blown panic someday. Today is not that day as the Chinese Cash Crunch has abated:
The troika has mandated bank mergers in Greece as a condition for aid. The reason for these consolidations is to prepare the Greek banking system for the massive depositor haircut that will take place after German elections. Greece’s debt situation is unsustainable, so it will require debt forgiveness soon to fill the gaping hole in its bailout plan. The FANG countries do not have the political capital to finance more PIIGS giveaways, so large bank depositors will be tapped for the cash.
In the meantime, Greek banks favor lending to the government rather than the private sector augmenting the contractionary forces in Greece’s economy, not unlike the Spanish situation outlined above.
Restaurants are slowly discarding full-time employees in exchange for much cheaper, part-time workers. Mainstream economists believe that this trend does not exist, but today’s Chart of Truth illustrates otherwise.
In a tight labor market, firms would be unable to turn one full-time job into two part-time positions. Workers would respond to a loss of hours by switching employers. With the current surplus of workers, firms have the leverage to do whatever they want, ERISA be damned. Obamacare is a disaster. It is too weak to meaningfully reform the bloated healthcare sector, but its complicated provision will act as a drag on growth nonetheless.