Tuesday, May 28, 2013

From emerging to submerging

Much excitement has been generated by the emerging markets because this is where economic growth is at a time when other markets are in doldrums. Can these markets avoid the problems of a world facing a synchronised economic depression?

The Wall Street Journal has produced several charts (see below) that compare the debt growth of selected advanced economies with those of emerging economies. For the advanced economies, their debt as a percentage of their GDP is declining while that of emerging economies is still growing. This disparity accounts for the seemingly sanguine prospects of the emerging economies.















But take a deeper look into the debt growth and you can discern a clear pattern. The advanced economies have moved further along the debt growth S-curves. The emerging economies are lagging behind but they are all approaching turning points of their respective S-curves. Don't be lulled by the low government debts of these emerging economies. Their precarious situations lie in their private debts. Most of these debts are being used to finance property booms since their export machines have faltered in the face of global excess capacity and falling consumption.

The next chart (from The Financial Times) compares the current situations of the emerging countries with that prior to the 1997 Asian financial crisis. Some of these countries are facing debt situations that are worse than those in 1997. Yet the picture is still incomplete since it doesn't incorporate bond and shadow banking debts. In 1997, they were rescued by the US economy which pumped increasing credit to generate the consumption that offloaded the exports of these struggling emerging economies. Now the US economy itself is under considerable strain. There's no saviour this time around. Instead of emerging prosperity, it's emerging  calamity that is staring in the face of these countries.


How a balance leads to imbalances

The notion that the leadership baton of the global economy will pass from the US to China or the EU is just wishful thinking. Instead, it is the baton of economic followership that the other big economic players have grabbed. The US economic leadership is immutable and should it eventually give, which it eventually will during the 5th Kondratieff Wave, the current global order will crumble.

Neither China, Japan nor the EU, specifically Germany, is in a position to assume the mantle of global leadership because they are all current-account (CA) surplus countries. The bigger their economies become, the more problems they create for the rest of the world. Take Germany, the economic problems of the southern European countries can be traced to Germany's preoccupation with maintaining continual current account surpluses since the formation of the eurozone on 1st January 1999 (see The Economist chart at left). Notice that prior to the eurozone, most of the other euro countries were having CA surpluses.

An updated chart from the recent issue of The Economist shows that Germany is still fixated with these damaging CA surpluses. The others can't match Germany's economic prowess because their labour productivity is inferior. This can't be redressed without an adjustment in exchange rates or drastic salary cuts. For example, Spain and Italy are expected to turn their deficits into a surplus this year but at the expense of substantial cutbacks in consumption. What's the purpose of saving when starving is the price paid?

As long as the euro exists, it will drive the EU into the ground. Germany can't get rid of its CA surpluses because its 2009 constitutional amendment requires the federal and state governments to maintain balanced budgets. Even its soccer clubs has a licensing system that ensures their fiscal prudence.

Germany is perplexed that others can't emulate its financial discipline, so through its economic clout, it is imposing this discipline on others. But by doing so it's tightening its own noose. Its CA surpluses will soon diminish once other EU nations have to reduce their CA deficits. Without the benefits of the CA surpluses, Germany's balanced budget restraint will unravel but that can't be undone without flouting its constitution. So expect Germany to face a long slog to an uncertain future.

Sunday, May 19, 2013

Why Obama deserves impeachment

Despite the almost daily record notching feats of the US stock indices, things are not going smooth with the US economy. Otherwise Obama wouldn't be facing possible impeachment hearings. The Benghazi and IRS scandals are only the beginning. If those fail to unseat Obama, more will come. Don't think about the US leading the world in the coming years as it itself will be in perpetual crisis mode.

The main failing of Obama is not his failure to manage crisis, though he's certainly lacking in this bit. Instead it's his inability to read the future based on a reading of the money supply movement. Obama should have known that the money supply, that is not the conventional definition by the economists but the total credit in the economy, would be in severe trouble once the sequestration kicked in on 1st March, 2013. And by correlation, so would be his position. All along throughout the Great Recession, itself a misnomer since it actually is a Grand Depression, government spending had been the driver of credit growth. Without it, credit growth would've stumbled, pulling the economy down with it.

It's not that anybody can reverse this trend. Credit will definitely contract, sequestration or not, because the consumption leg of the 4C is floundering. It had been propped up only by the grace of Obama's deficits. Even Mitt Romney, if he had been elected, would've been coming up against similar intractable situations as Obama is now facing. Probably not Benghazi or IRS since those could be blamed on his predecessor but others would in time rise to the surface.

How do we know that federal debt is being constrained given that the Fed Funds Flow statement for Q1 2013 would only appear early next month while that for the current quarter in September 2013? Easy, just look at the budget deficit. This year's deficit has been projected at US$642 billion. That's half a trillion less than last year's.

The Republicans just need a few more Senate seats in the 2014 mid-term elections to give Obama the boot. Or they may succeed earlier provided the total credit in the system declines for a couple of quarters before making their impeachment move. See how powerful is the soulless credit market in determining one's fortunes.