Stock World Weekly - The Anti-Crisis Bazooka & Other Bedtime Stories
Excerpt from the Week Ahead Section
The turmoil in the eurozone makes it easy to overlook positive signs in the U.S. economy, such as this week’s drop in Initial Claims for unemployment insurance, or Friday’s report showing consumer confidence climbing for the fourth month in a row. Financial blogger Scott Grannis argued, “No one can say for sure that the U.S. can avoid contagion, but so far the U.S. economy appears to be decoupling from Europe, as Europe slumps but conditions here continue to improve.” Others disagree. Charles Biderman of TrimTabs “dismisses the simple-minded decoupling perspective.” As Zero Hedge reported, Biderman believes, “U.S. growth will be in the doldrums as European de-leveraging drags global growth down with it. It's not all doom-and-gloom though...this collapse won't happen tomorrow, given balance sheet strength, although selling into rallies is the clear picture he is painting.”
Not everything is rosy. Monday’s Non-Manufacturing ISM report for November came in at 52.0%, down nearly a point from October, indicating slowing growth. The employment subindex contracted too, dropping to 48.9% from 53.3% in October. And China is facing serious problems. Slack demand in U.S. and European markets is weighing on China’s export-driven economy. Easing inflation and slowing growth in both imports and exports was pressuring Beijing to loosen its credit policy. However, on Friday, the Politburo issued a statement confirming its commitment to keeping a “prudent” monetary policy while adopting a “pro-active” fiscal policy. This means that rather than relying on massive stimulus, Chinese authorities are likely to rely on tax cuts and other administrative measures to help encourage consumer spending. (China’s exports weaken amid European troubles, import also slow)
Friday’s new deal from the European Union to create deeper financial integration between member nations, to save the struggling eurozone, sparked many responses. An exuberant ECB President Mario Draghi declared, “It’s a very good outcome for the euro area, very good. It’s going to be the bases for much more disciplined economic policy for euro-area members...certainly it is going to be helpful in the present situation.” German Chancellor Angela Merkel called it a “breakthrough to the stability union.”
At the other end of the spectrum, British Prime Minister David Cameron emphatically rejected the proposal. “What was on offer is not in Britain’s interest so I didn’t agree to it. We’re not in the euro, and I’m glad we’re not in the euro. We’re never going to join the euro and we’re never going to give up this kind of sovereignty that these countries are having to give up.” (U.K. to eurozone nations: We’re out, good luck)
Commenting on the turbulence in the eurozone, Research Professor of Economics at the University of Missouri, Michael Hudson wrote, “The kind of warfare now engulfing Europe is thus more than just economic in scope. It threatens to become a historic dividing line between the past half-century’s epoch of hope and technological potential to a new era of polarization as a financial oligarchy replaces democratic governments and reduces populations to debt peonage.
“For so bold an asset and power grab to succeed, it needs a crisis to suspend the normal political and democratic legislative processes that would oppose it. Political panic and anarchy create a vacuum into which grabbers can move quickly, using the rhetoric of financial deception and a junk economics to rationalize self-serving solutions by a false view of economic history – and in the case of today’s ECB, German history in particular.
“Governments do not need to borrow from commercial bankers or other lenders. Ever since the Bank of England was founded in 1694, central banks have printed money to finance public spending. Bankers also create credit freely – when they make a loan and credit the customer’s account, in exchange for a promissory note bearing interest. Today, these banks can borrow reserves from the government’s central bank at a low annual interest rate (0.25% in the United States) and lend it out at a higher rate. So banks are glad to see the government’s central bank create credit to lend to them. But when it comes to governments creating money to finance their budget deficits for spending in the rest of the economy, banks would prefer to have this market and its interest return for themselves.
“European commercial banks are especially adamant that the European Central Bank should not finance government budget deficits. But private credit creation is not necessarily less inflationary than governments monetizing their deficits (simply by printing the money needed)...
“It is mainly government that spends credit on the ‘real’ economy, to the extent that public budget deficits employ labor or are spent on goods and services. Governments avoid paying interest by having their central banks printing money on their own computer keyboards rather than borrowing from banks that do the same thing on their own keyboards...
“If the euro breaks up, it is because of the obligation of governments to pay bankers in money that must be borrowed rather than created through their own central bank. Unlike the United States and Britain which can create central bank credit on their own computer keyboards to keep their economy from shrinking or becoming insolvent, the German constitution and the Lisbon Treaty prevent the central bank from doing this.
“The effect is to oblige governments to borrow from commercial banks at interest. This gives bankers the ability to create a crisis – threatening to drive economies out of the Eurozone if they do not submit to ‘conditionalities’ being imposed in what quickly is becoming a new class war of finance against labor...
“Today’s economic crisis is a matter of policy choice, not necessity. As President Obama’s chief of staff Rahm Emanuel quipped: ‘A crisis is too good an opportunity to let go to waste.’ In such cases the most logical explanation is that some special interest must be benefiting. Depressions increase unemployment, helping to break the power of unionized as well as non-union labor. The United States is seeing a state and local budget squeeze (as bankruptcies begin to be announced), with the first cutbacks coming in the sphere of pension defaults. High finance is being paid – by not paying the working population for savings and promises made as part of labor contracts and employee retirement plans. Big fish are eating little fish.” (Europe’s Transition From Social Democracy to Oligarchy)
Heading into next week, Phil wrote in Income Portfolio – Year End (Almost) Review: “Next month will be busy, with plenty of adjustments to make. A Santa Claus rally would be nice but we’re not counting on it. Less than half of our VIRTUAL $1M buying power is in use. We’re not looking to add many new trades until we take others off the table. No matter what the market does, we’re going to want hedges over the holidays, but then we’ll see how things shake out in January.”