The Curious Race to the Bottom

The continued uncertainty surrounding Greece and their out-of-control fiscal situation may be what the EU has been wishing for. My suspicion (it is only a suspicion) is that the the EU, lead by France and Germany, want this uncertainty to continue. If we look at the statements coming out of the EU, it becomes clear that something is up. For example Bloomberg's article Germany’s Bruederle Rules Out Bailout for Greece :

“I don’t think that a bailout is the right way because German and French taxpayers can’t pay for Greece,” Bruederle said in an English-language interview in Davos, Switzerland today. “Maybe they will give certain help, but first it’s for the Greeks to solve their problems.” When asked what kind of help he’d consider, he said “it’s too early to discuss.”
...

The comments came a day after EU Monetary Affairs Commissioner Joaquin Almunia said policy makers have no “plan B” to help Greece.

Usually, if you want to limit a crisis, you don't want to come out with vague statements. You want to reassure the public and investors that a comprehensive plan is being worked out.

From the same article:

Prime Minister George Papandreou said on Jan. 28 that Greece is being victimized by rumors in financial markets and he denied seeking to borrow from European partners.

Really, victimized, Greece is not part of the PIIGS countries because of their fiscal responsibility.

The reason they would want this uncertainty to continue, to devalue the Euro. In an economic recession where governments want to create employment, a weak currency means that your exports are cheap i.e. more potential exports, more jobs.

With unemployment at 10% in the Eurozone, any means to slow or reverse the trend becomes attractive. The crisis has proven quite effective in weakening the Euro.

Euro Value


With the American dollar strengthening and Obama's State of Union address focusing on jobs creation, the Americans are probably not happy with the current situation....

Book of the week

The current crisis has been given a myriad causes and reasons, many of them are just simply wrong. Most ideological explanations, when pressed against the reality of the situation shatter into no more than ideological voodoo.

Thomas Woods' book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse is by far the most rational explanation of the current crisis. The Austrian Business Cycle, which Woods uses in this book has withstood the test of the historical application. From 14th century Venice to the current economic problems, Austrian Business Cycle (ABC) fits.

As most view the bust as the problem, it limits their analyse of the situation. ABC looks at not only the bust but what preceded it, the boom. The real problem resides in the boom as malinvestment increases because of manipulations of the interest rates under the market rate. The bust, is the market trying to recalibrate the economy and wash away the malinvestment.

Woods' book makes a logical and convincing case and uses historical event to further justify his explanation of the current crisis. It is without a doubt, a must read that will change your outlook on the business cycle forever.

GDP Growth in US 5,7%?????

The new GDP numbers are out in the US, 5.7 percent increase in gross domestic product at an annual rate. The Bloomberg article U.S. Economy: Growth Jumps 5.7%, Fastest Pace in Six Years states:
The U.S. economy expanded in the fourth quarter at the fastest pace in six years as factories cranked up assembly lines, indicating the recovery may be strong enough to be weaned from government support.
...
Consumer spending, which comprises about 70 percent of the economy, rose at a 2 percent pace following a 2.8 percent increase in the previous three months. Economists projected a 1.8 percent gain, according to the survey median. Efforts to rebuild depleted inventories contributed 3.4 percentage points to GDP, the most in two decades.

Unfortunately, growth may not be as robust as first report. It has become an interesting game of cat and mouse with the numbers. The numbers are often reassessed later, when they do not make headlines, on the downside. Also many private economist who do the number often disagree with some of the shake and bake accounting and have very different results when compiling the numbers. For example, Shadow Stats assessment of GDP:


Courtesy of ShadowStats.com

It is clear that the numbers from Shadow Stats reflect the disconnect between government number and what is probably really going on. The fact remains that the US consumer, that is responsible for 70% of GDP, is going through a deleveraging period and will be limited in his spending for a couple more years. On top on deleveraging, unemployment rates remain extremely high.


Courtesy of ShadowStats.com

The U6 measure of unemployment probably better reflect the state of the American worker. Without significant change in employment numbers and leverage, the American consumer may have a driven a little gain now (the stated 2%), but cannot drive any sustainable recovery. Exporting goods and service will have to become a more important part of the American economy if they wish to see significant growth return in any sustainable fashion.