Around the Globe: Weekend Edition September 21-22


Merkel Appeals for Strong Europe as Steinbrueck Attacks – Bloomberg.

Merkel and Steinbrueck

There are two possible outcomes for Sunday’s Bundestag elections.  Either Merkel and her coalition win outright, or she must form a grand coalition with the Social Democrats.  Eurocrisis fighting efforts will become more dovish under the second scenario while probably remaining the same under the first.  In either situation, concessions and expensive ones at that will be made in the name of preserving the euro after the election.  Results should be in around 2PM EDT.


Rajan’s India Inflation Battle Pressures Singh as Election Nears – Bloomberg.

India CPI 09.2013

The RBI is tightening monetary conditions in order to squelch inflationary pressures.  The government could reform its internal markets to maintain economic growth in the face of tight money, but entrenched special interests are able to thwart these efforts particularly in advance of elections next year.  While the rate hike will do the job, it does so with the risk of recession.

The Indian situation should sound familiar.  There is another country forcing its central bank into doing all the heavy lifting while the political system remains paralyzed, and it is heading for a debt limit crisis in a few weeks.


From Thursday’s Edition:

Fear of missing out fuels China property market.

China Housing Index 09.2013

China’s property market has become quite bubblicious in the last year. In this article alone, there are at least three factors signalling a bubble:

  1. The belief that prices can only go up has taken hold.
  2. People are regretting missing out on the price rises.
  3. The Real Estate market is accounting for an ever-increasing portion of economic growth prompting the government to continue policies that are inflating the bubble.
  4. Speculators comprise the majority of buyers.

BTW, each of the four points existed right before the U.S real estate market began its descent.  This bubble will pop, too, but no one knows when.

From Wednesday’s Edition:

ECB advisers call for more long-term loans | Reuters.

Eurozone Loans to the Private Sector Through 08.2013

There is a loose money faction within the ECB that wishes to reopen LTRO in order to boost private lending for business expansion.  That’s the reason we are being told anyway.  In reality, two rounds of LTRO commencing at the time indicated by the green arrow failed to slow the decrease in private lending.  The red arrow highlights the inflection point where private loans began contracting at a faster rate at about the same time as the Draghi pledge.  Since Eurozone banks are not deleveraging, where could all the cash from LTROs and reduced lending have gone? Isn’t it obvious:

Eurozone Debt to GDP Ratio

Creaky Eurozone governments led by Italy, Spain and France have added over  €400bn to the debt stock and someone needs to purchase this debt so that these countries can continue financing themselves.  Banks rather loan to governments a higher yield with cheaper money borrowed from the ECB, which is also functioning as a buyer of last resort, than loan money to the private sector.  Loans to businesses are neither guaranteed nor eligible for the same collateral treatment by the ECB; hence government borrowing is crowding out the private.

From Tuesday’s Edition:

Consumer Prices in U.S. Rose Less Than Forecast in August – Bloomberg.

U.S. consumer prices muted, but rents and medical costs rise | Reuters.

U.S. Consumer Prices Rose 0.1% –

US Inflation Rate YoY

When the economy is strong, increasing demand generally stokes inflation as can be seen above from Jan 2002 to 2008 during the post 9/11 recovery.  Today’s monetary easing is based on the theory that this process also works in reverse.  That is, printing more money to purchase bonds will stoke inflation leading to a pickup in economic growth.

Current theory does not account for the diminishing marginal returns of easy money.  Each successive round of monetary easing has  resulted in less benefits inuring to the American people:

Income Growth 99 vs 1

At one time, the Fed’s actions would be expected to lift the economy from its doldrums, but too many years of loose money have taken their toll.  Today, the best we can hope for from additional money printing is stagnancy, which is different from stability.

From Monday’s Edition:

U.S. manufacturing sector regaining some momentum | Reuters.

U.S. Factory Output Picked Up in August –

US Industrial Production Through August 2013

The latest manufacturing reports are being taken out of context to present a picture of “hope.” Industrial production did rise in August, but as we can see above gains in this sector have been trending downward since a robust recovery following the Great Recession.  August’s results do not reveal a manufacturing sector expanding at rapidly enough to significantly lower unemployment and raise wages.  Stagnant wages are what is holding the economy back at this juncture.


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