Growth?

According to an article in the prestigious Economist (forwarded to me by my friend Dennis Duitch) looking at what the world will likely produce in this coming year: “2012 may be the year of self-induced stagnation… How grim will depend on how far, and for how long, politicians persist with misguided policies, since America is unlikely to see big political compromises in a presidential-election year. On both sides of the Atlantic a deep recession or a serious financial crash would probably induce bolder solutions, but the most likely outcome is an economy not quite weak enough and a crisis not quite large enough to galvanize spineless politicians… For all the upheaval, the election will leave America more or less where it started: stuck in an economic slump, bitterly divided politically and worried about its diminishing stature, at least in relative terms, around the world. The new president will have few tools at his disposal to fix all this, and too little support in Congress to make much use of them anyway…”

Idiotic American policies abound, such as adhering to the fully discredited mythologies that reducing taxes on the richest segments of our society “trickles down” to create jobs or that a deregulated Wall Street will stop fabricating packaged financial instruments (derivatives) that move money around and create wealth for the creators and instead deploy their capital to invest in and lend to America’s small and middle level businesses, where most of the new jobs are supposed to be coming from. Show me a rich person who uses tax savings to hire workers without consumer demand, and I’ll show you a rich person who won’t be rich much longer. And we've already seen what a deregulated Wall Street can do. Delusionary assumptions also continue to push American military efforts and supporting infrastructure, in areas in the world where little or no benefit is coming back to our country. Even Afghanistan made its recent oil agreement – $7 billion expected over 25 years – with China, not the United States.

American residential real estate continues to fall, as increasing numbers of American homes drop below their mortgage values threatening another round of default. With the euro down over 10% against the dollar, US exports will be that much less affordable in Europe, just as we were counting on that demand to keep our modest improvements on the unemployment front moving along. Fortunately for us, however, Europe only accounts for about 8.5% of the revenues to US companies that comprise the Standard & Poor’s 500 stock index, according to Tobias Levkovich, Citigroup’s chief equity strategist (cited in the January 1^st NY Times). Levkovich believes that all of this belt-tightening will dip Europe back into recessionary times. We are vastly better able to weather the storm than Europe, it seems. After all, the euro plunged by more than 10% against the U.S. dollar and even though December is typically the peak of seasonal employment, “The Labor Department says employers added a net 200,000 jobs last month and the unemployment rate fell to 8.5 percent, the lowest since February 2009. The rate has dropped for four straight months.” Washington Post, January 6^th.

Indeed, Europe is facing a deeper crisis as increasing interest rates paid by governments – moderated when funds are provided through the European Central Bank (Frankfurt-based and pictured above) as opposed to open-market borrowings by impaired individual nations – often negate significant austerity efforts and continue to widen deficits. But even more relevant is the misplaced belief that austerity is the primary solution to our global malaise. Even with new taxes and spending cuts, for example, Spain just announced that its deficits continue to escalate, and across the board, the austerity programs have not put the slightest dent in the overall stagnation faced by the weakest European economics, which are likely to fall further. Europeans are waking up to the reality that without investment in their own futures, which at this point can only come from the public sector given the profound skittishness of the private sector that is unwilling to lend or invest to any meaningful level, the cherished “growth” that puts people to work and repays borrowed deficits is simply a deferred wish with no near term likelihood of implementation.

“Saying that Europe was facing its ‘harshest test in decades,’ Chancellor Angela Merkel of Germany warned on New Year’s Eve that ‘next year will no doubt be more difficult than 2011’ — a marked change in tone from a year ago, when she praised Germans for ‘mastering the crisis as no other nation.’ Her blunt message was echoed in Italy, France and Greece, the epicenter of the debt crisis, where Prime Minister Lucas Papademos asked for resolve in seeing reforms through, ‘so that the sacrifices we have made up to now won’t be in vain.’” New York Times, January 1^st. While lesser economies expect this fate, France is girding for a downgrade in her credit rating, with unknown consequences to the overall European banking system.

With Merkel facing reelection, and with frugal Germans believing that they can withhold their backing to supporting a deeper pan-European financing needs, her inability to provide the only real creditability the international markets care above is only making matters worse. Germany has kept the Central Bank (located in Germany, no less) from becoming the lender of last resort, knowing that it would be the German economy that would be the major support for such an effort. Germany’s consumer spending accounts for more than the aggregate of such spending in Spain, Portugal, Ireland and Greece, and her unemployment rate – 5.5% – is far beneath that of most other European nations.

Having already invested in their future, Germans want insulation from their prodigal neighbors, but no matter what Germans may believe, they cannot spin back to a separate currency, leaving the rest of Europe to twist in the wind, without seriously undermining their own financial system. German banks are mired in the failed economies in lesser European nations, and the determination to withdraw from the Eurozone – if Germany were seriously to contemplate such a move – would decimate the euro before Germany were able to implement such a decision. Germany is tied to the euro, no matter what.

“‘Every government in Europe with the exception of Germany is bending over backwards to prove to the market that they won’t hesitate to do what it takes,’ said Charles Wyplosz, a professor of economics at the Graduate Institute of Geneva. ‘We’re going straight into a wall with this kind of policy. It’s sheer madness.’ … Rather than the austerity measures now being imposed, Mr. Wyplosz said he would like to see governments halt the recent tax increases and spending reductions, and instead cut consumption taxes in a bid to encourage consumer spending. More belt-tightening, he said, increases the likelihood that Europe will see a ‘lost decade’ of economic torpor like Japan faced in the 1990s.” NY Times.

With the probability of shrinking GDP’s, many European nations are going to have some tough explaining to do to their constituencies when all of these austerity measures continue to fail to reignite any semblance of job-creating growth. January is a big month for Europe as leaders will meet in the second week to discuss the specifics of a new EU economic treaty that will require governments to accept strict limitations on their spending, and as later in the month the same leaders will ironically meet to discuss how to encourage growth. There is irony in these pairing of meetings!

What’s my bottom line? By all means cut spending on provisions that bring little or no benefit to the home country. In Europe, that probably requires tackling over-stringent job protection and excessive pensions, fringe benefits and marginal civil servants. In the United States, it probably means addressing our vast over-spending on things military and redeploying our money into long-term value-creators – INVESTMENTS – through education/training, building and repairing infrastructure and funding cutting-edge medical and technological research. If we want “growth,” austerity is hardly the path, particularly at a time when private investment is simply terrified to take chances.

I’m Peter Dekom, and I approve this message.