Financial Market Snapshot September 2013

The Continental Economics Institute’s Financial Market Snapshot

September 3, 2013

by Antony Mueller

Economic growth and monetary conditions

The period of relative tranquility on the international financial markets over the past couple of months is ending.  Major changes have already taken place, many more are about to happen. In the United States, the American central bank is about to end its monetary policy of quantitative easing. The effects of this change have already led to a shift in international capital flows. Money moves out of the emerging markets. This way not only the Brazilian real has weakened, but devaluation also hit hard the Indian rupee. In Europe, the announcement of its “Outright Monetary Transactions” program by the European Central Bank (ECB) last year has tranquilized financial markets and lowered the risk perception of international investors of the creditworthiness of the European crisis countries. Growth is picking up in the United States and in Japan. Over the past couple of years, the major central banks have swamped the globe with liquidity. If economic recovery should continue, a new tough job already awaits central bankers: how to avoid worldwide inflation.

Commodities

There are signs that the super cycle in commodities is not yet over. There is little reason to expect the oil price to fall. On the contrary, the tensions in the Middle East are rising. Conflicts that are even more violent seem inevitable. This way oil and gold are set for rebound. Other commodities will benefit when global economic recovery will continue. There are signs that Europe is moving out of its slump and that the United States and Japan are back on their growth paths. Latest figures of the Brazilian gross domestic product indicate the end of the economic downturn of this country. The Chinese hunger for natural resources is still unbroken. With these demand factors well in place and given the immense liquidity overhang in the financial markets, the failure by central banks to curb excessive monetary growth can rapidly transform into a wave of price inflation.

International trade

One of the good signs over the past couple of years has been the fact that the international economic and financial crisis has not provoked protectionist measures. Except by some leaders of emerging economies, there has been no threat of protectionism among the major industrialized countries. Even in the face of persistently high trade deficits, the United States did not bring up protectionism. Nevertheless, the global macroeconomic constellation has remained unsustainable. It cannot go on forever that China and other Asian emerging economies as well as countries like Brazil and other emerging economies will continue to finance the American trade deficit in its present dimensions. The problem with postponed necessary adaptations is that these eventually tend to take place in vehement and uncontrolled manner.

Outlook

The monetary policy of the past couple of years with its extreme expansion of the monetary base comes back now to haunt central bankers for years to come. Solid economic recovery is under threat because the gigantic liquidity overhang threatens price stability. Much earlier and stronger than otherwise - if there had not been a monetary expansion - central bankers will now have to raise interest rates in order to avoid price inflation. Soon we may hear from the policy makers that it was due to their action that the recovery finally has come. They will assert that the threat of price inflation is a completely different matter with no link to earlier monetary policy. In reality, however, things are quite the opposite of what these statements will say. Not only would economic recovery have come much earlier without central bank intervention, the return to economic growth would also not have to face the risk of price inflation as it does now because of the excessive creation of central bank liquidity over the past couple of years.

Financial market snapshot

Economic policy in the fix
by
Antony Mueller

The international financial system is in intensive care. The system is kept alive through massive transfusions of liquidity. Central banks in the United States, Europe and Japan have opened the floodgates of financial liquidity in order to keep the system alive in its state of emergency. How long can it go on? For years by now, interest rates have been at zero bound. Since the early 1990s, Japan has tried to stimulate its economy through easy money and public spending. At the inception of the current crisis, the United States have joined and more recently Europe, too, has begun to slash interest rates down close to zero. Yet like in Japan, in the United States and in Europe, the prime instruments of monetary and fiscal policy no longer work. What has been going on?

One main reason why the traditional instruments of monetary and fiscal policy no longer work is the fact that public debt has reached levels that are unsustainable. The more governments fight against stagnation, the more they produce the very obstacle against growth because of rising debt. In the meantime monetary policy has brought down interest rates to zero bound. While this seems to be fine for financial market, it also means that there is no longer room for expectations of a further decline of interest rates.

Where do we go from here? Central banks try as hard as they can to keep interest rates low. Any significant rise of the real interest rate would bring governments closer to default. There is no room left for central banks to lower nominal interest rates. There is only one way out of this dilemma in the perspective of the major central banks: price inflation. Nevertheless, inflation rates remain stubbornly low in the major economies. Central banks still face a nightmare: deflation with the consequence of sharply rising real interest rates which would not only bring many companies down and lead to higher unemployment, deflation would also mean that governments themselves are threatened by default.  

Investor's world map

Investement desert storm

Unemployment and money

The Danger Beyond Employment Numbers

By Anthony Wile

26

Anthony Wile

A short article posted at the conservative Breitbart website and then posted at Drudge.com shows us clearly how the American Dream is failing. Far from aspiring to a house, two cars and a vacation every year, many US citizens now dream of no more than full-time work. How expectations have fallen.
Here's how the article begins:
ONLY 47% OF ADULTS HAVE FULL-TIME JOB. The report provides clear evidence that the nation is splitting into two; only 47% of Americans have a full-time job and those who don't are finding it increasingly out of reach.
This is a startling description of the US's employment picture. If this were the 1950s, such a statistic might be understandable, as US women were reportedly not seeking jobs in great numbers.
But the inflation of the 1970s meant that more and more families needed the support of two paying jobs. By the 2000s, there were reports of three and four-job families, where the husband might work two jobs and the wife one or even two, as well.
That no doubt changed after the onslaught of the Great Recession of 2008 – not because price inflation slowed but because the jobs market in the US and in fact throughout the Western world collapsed. Today, the jobs picture is grim, as we can see from the Breitbart report. Here's more:
Of the 144 million Americans employed last month, only 116 million were working full-time. Friday's report showed that 58.7% of the civilian adult population of 245 million was working last month. Only 47% of Americans, however, had a full-time job. The market's positive reaction to Friday's report is another sign of how far our economic expectations have fallen.
If today the same proportion of Americans worked as just a decade ago, there would by almost nine million more people working. Just in the last year, almost two million Americans have left the labor force. With a majority of the population not holding a full-time job, it isn't surprising that economic growth has been so weak.
In June, the number of Americans who wanted to work full-time, but were forced into part-time jobs because of the economy, jumped 352,000 to over eight million.
The report is being greeted by the mainstream media as "better than expected" but Breitbart points out that "it only measures those who are working or actively looking for work. There is a growing number of Americans slipping through the cracks of the job market."
The article doesn't mention three other things. First, there is a vast gray and black employment market in the US that exists outside of government control. Second, 75 percent of US citizens are now reportedly living paycheck-to-paycheck, according to recent studies. Third, a similar number (according to a Forbes report) apparently find little or no satisfaction in the work they do.
When most people in a country have little or no resources – no money or land or even a house – and take no pleasure in working, and when only half of what may be considered the potential working population is formally employed, then it is probably not too strong a statement to say that the system itself is not producing satisfactory results and is even in danger of breaking apart entirely.
The United States of today little resembles the one of the 20th century, when reigning economic guru John Kenneth Galbraith produced books like The Affluent Society that regularly worried about the corrosive effects of wealth and leisure time on the US population.
The US's advantage throughout the post-War years was its dollar reserve currency; US officials could fund deficit spending by printing dollars without generating price inflation. Countries around the world had to hold dollars because they needed dollars to buy oil.
This system is changing now. The dollar is under attack by the BRICs, specifically by the Chinese and Russians, and it seems clear the world community wants to move to something else as the world's major financial support. John Maynard Keynes dreamt of a world currency and so does the IMF that supports its Special Drawing Rights as a potential replacement for the dollar.
The US in particular will not benefit from ever-more globalized fiat money. What the US needs is a stiff dose of freedom: fewer taxes, less regulation and, above all, the re-imposition of the kind of free-banking system that served the nation well prior to the Civil War. Money needs to be competitive, not monopolized by a clique of central bankers.
Those running the system obviously know it is not working, just as they know what would fix it. But they do not seem to care. If anything, they seem to actively wish for things to get worse – to further impose socialism and globalism on the suffering West.
I'd characterize this not as a rational strategy but as a kind of "grand illusion." Look around the world from Southern Europe to Africa to the Middle East to Brazil and even China, and one can see growing signs of violent disturbances. These have not yet reached the US but civil protests are growing there, as well.
Proponents are supporting a flawed sociopolitical and economic methodology that can yield explosions they will perhaps not be able to control. Egypt may only prove the latest example. This is the danger that lies beyond the numbers and is not often discussed with the seriousness it desserves
Source

Anybody noticed?

Well, the great bear market has begun. Read my lips.

How things must play out