Charles Gave: "France Is On The Brink of A Secondary Depression"

Tyler Durden's picture

Authored by Charles Gave of,

France is engulfed by a political, economic and moral paralysis. The president has record low popularity, unemployment is making new highs and the tax czar of a supposedly left wing government just quit after repeatedly lying about a pile of cash he had stashed in a Swiss bank account. From such a sorry state of affairs, you might think that things could only get only get better. Unfortunately, economic cycles do not work this way and it is my contention that France is about to enter what was known during the gold standard era as a “secondary depression.” The rigid design of the euro system means the whole eurozone is prone to the kind of brutal cyclical adjustments seen in that hard money era of the 19th and early 20th centuries. But having reached the logical limits of its decades long experiment in state-run welfare-capitalism France is far more exposed than even its struggling neighbors.

By way of refresher the typical economic cycle during the gold standard era ran something like this:

  • The first phase of the cycle sees investors respond to strongly positive returns on capital by bidding up the value of assets and boosting leverage. Banks loosen their lending standards, genuine entrepreneurs and charlatans become indistinguishable and commentators declare that some new innovation means this time is “different”. The scarcest commodity during this period of plenty is memory of past cycles.
  • The first signal that the cycle has turned is a market "panic". The trigger is the realization among market participants that the return on invested capital has fallen below the cost of capital. This shock adjustment phase usually lasts a few months at most, and is associated with collapsing asset markets together with a number of bankruptcies in the financial system.
  • An end to the acute phase of the crisis is usually accompanied by a collapse in interest rates, causing market participants to conclude that normal business conditions have resumed. A massive relief rally usually ensues.
  • What follows is the far more serious secondary depression which unfolds like a creeping hangover after an indulgent night on the town. This capitulation materializes as investors come to realize that the prevailing ROIC has remained below the cost of capital. Back in the gold standard era, such secondary depressions usually lasted three to five years and accounted for most investment losses.

It is increasingly clear that both Italy and Spain are caught in a debt trap and have now entered the debilitating phase of the adjustment cycle. Devaluation—their one viable escape option—is ruled out by the strictures of euro membership.

Last year, I argued that France was primed to follow the same ruinous trajectory as its immediate southern neighbors (see The Coming French Depression). The policies followed by the French government over the last nine months mean this outcome has become a near certainty. The latest awful French economic data has removed any doubt that I reserved.

The case for the French depression

My analysis starts with an assessment of business conditions as illustrated by the INSEE survey. This survey is published monthly and has a long and reliable history. The lead time between the survey release and different economic variables varies from three to nine months.

A simple regression between the survey results and France’s GDP indicates that within six months the economy will be contracting at an annualized rate of about 1%.

I have long used industrial production as the best available proxy for private sector activity and the latest readings are to say the least, ominous. France is extremely unusual in that government spending accounts for a full 57% of national output (only Denmark has a higher ratio). Since the public spending share of GDP is not likely to contract, the burden of adjustment will be borne by the private sector—a 3% cratering of this part of the economy is likely to eventuate.

As a result of this collapse in private sector activity, employment levels are going to implode.

And with French employment collapsing, it is to be feared that French consumption follows suit. The vicious spiral of decline will ensure that France enters a secondary depression of the type outlined at the outset of this piece.

Wider economic consequences

A divergence in the French and German business cycles is starting to open up for the first time in recent history which will lead to escalating risk within the eurozone system.

The severe squeeze on household income will ensure a collapse in French imports which can only have negative consequences for producers in Spain and Italy—for most eurozone countries France is their second largest export market.

France’s budget deficit is going to explode. Higher unemployment will push up government spending, while reduced consumption causes a collapse in VAT receipts. And lower economic activity reduces all forms of tax income that a voracious government machine so depends upon.

As a result, the primary budget deficit will deteriorate massively in 2013 - it is worth noting that this outcome has materialized each time that our business survey leading indicator has fallen so precipitously. French long rates will quickly come under pressure as was the case for Spain and Italy once their budgetary situation deteriorated—the French government is hugely complacent about its entitlement to low cost funding even though any spike in rates will quickly make the budget situation untenable. And as goes the economy, so goes the corporate sector. Profits for those companies exposed to both the domestic economy and the battered southern European markets are also likely to face a severe squeeze.

But what especially scares me about the French situation is that the economy is already suffering a huge credit crunch which can only get worse.


France has economic problems that are particular to its political culture. While speculative excesses in Spain and Ireland were concentrated in an over-built, over-geared real estate sector, French exuberance was a civil service affair. (Remember the adage: too many houses in Spain, too many factories in Germany, too many civil servants in France). This out-of-control public sector machine used easy funding conditions through the 2000s to bolster the ranks of an already bloated bureaucracy - the assumption was that such captive groups would vote for their ultimate pay -masters come election time. (This is what I called social clientelism). As a result France is the only country that we follow which has seen the public sector grow faster than the private sector in every year since 1987!

The interesting thing is that the government share of GDP in France has relentlessly risen regardless of whether a right or a left leaning party was in power. Such has been the complete capture of the French economy by the bureaucracy that the public spending trend has remained unbroken. In simple terms the fellows managing France’s economy have organized a system such that the public sector can continually pillage the private sector. This institutionalized method of stealth robbery has created a self-reinforcing cycle of economic decay such that lower corporate profits feed into reduced private investment, and so on to lower economic growth, resulting in rising unemployment levels.

At its core, France’s economic malaise is a failure of public morality. The public sector elites not only detest the private sector, but they also believe that it is a higher calling to steal money from entrepreneurs and give it to civil servants. Suffice to say this moral bankruptcy of the body politic means the situation is intractable—when the population is bombarded with propaganda that wealth creation is somehow dirty, while it is morally permissible for the state to expropriate all private gains, it will be hard to build an environment for economic growth.

The fact is that elites in France are convinced that communist technocracy is a superior system to capitalism, and this belief has been accepted by a large part of the population. So the solution for France is not incremental reforms to labor markets, but a complete overhaul which would bring to power sensible people with a different set of values. In the short term, radical change is mitigated by the fact that France last year voted for more pillaging and enhanced communist technocracy (the government is now in overdrive seeking to oblige them). Of course, the event that will cause the music to finally stop is when foreign investors stop lending. That moment will likely coincide with the last French entrepreneur exiting for London, New York or Shanghai—he or she should turn off the lights before bidding a sad farewell.

Until quite recently, my working assumption was that a full-blown French debt crisis would occur between 2014 and 2017. In light of the extraordinary malfeasance of the current government I have changed my mind and believe that France is now extremely near to that abyss. Fasten your seat belt in Europe—the world’s last truly Communist country is about to implode.

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Temporis's picture

Mass executions with a side of severed heads please.

hedgeless_horseman's picture



The public sector elites not only detest the private sector, but they also believe that it is a higher calling to steal money from entrepreneurs and give it to civil servants.

This is MOAR propaganda.  The English bankers set this course at Waterloo, when they got rid of he that hated ccentral bankers.

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."


~Napoleon Bonaparte


The Big Ching-aso's picture

I guess 'boiling frogs' and that oft heard NWO meme is really starting to hit home.

hedgeless_horseman's picture



...steal money from entrepreneurs and give it to civil servants.

The bankers steal money from EVERYONE and keep it.


PS:  I told you so.  Up 28%+ in 5 days.

onewayticket2's picture

What is the French word for "Timmmmbberrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr"?

hedgeless_horseman's picture



Le déluuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuge!

Supernova Born's picture

I smell Keynesianism wanting to blame the gold standard a second time for what it didn't cause the first time.

BaBaBouy's picture

FIAT SYSTEM Is Collapsing ...

WorldWide ...

How Can You Have A Solid Money System based On BITS and BYTES On Banking Hardrives.

The MONEY Does Not Exist!

GOLD $50K Will Back This Fiat In The Nearer Future!

resurger's picture

Tyler and Zhers:

Please see that Gold today was trading at $1,575 Oz and the gold in Shanghai was trading at $1,606 .. It was free $33 free arbitrage ... in Shanghai they only take Physical delivery of gold, not like the LBMA and COMEX ... see today gold is at 1,586 .. the Arbitrage is closing ..

What this means, is that the BRICS are head strong to destroy the Paper pushers in NY and London .. this was excellent observation by Jim Willie CB

The Shanghai Metals Exchange sports a significant useful practical Gold price spread, higher than the posted London and New York price. It has opened the door for arbitrage for the last two months or more. My firm suspicion is that the BRICS Development Fund will convert USTreasury Bonds by means of the Shanghai window, thus draining the London centers of their gold bullion. As of 8am today in London, the Shanghai Gold price had a 1591 handle, compared to a 1555 handle in London. That constitutes a $36/oz spread, very feasible for arb trades and the associated drainage of London metal. The professionals are having a field day, exploiting the artificially offered Gold price achieved from yet more naked gold futures contract shorting. The depletion of the SPDR Gold Trust (GLD shares) continues at a frenetic pace. The big US banks are shorting the GLD shares, removing its gold bar inventory overnight, and selling into the market. Or else they are covering their similar sales obligations in like manner. The key to the divergence is that as the phony paper Gold price declines more and more, it signals the demise of the COMEX itself, a shutdown. The event cannot happen without the price divergence, the fast falling paper Gold price versus the stable rising physical Gold price. When the COMEX goes dark, from depleted inventory, from vacated client players, the Gold price will actually not be known for some time. Then later, it will be on display from various key centers across the globe, including Shanghai where naked futures contract activity is not sponsored by the state.

See for your self:


hedgeless_horseman's picture



It was free $33 free arbitrage*



*Shipping and handling charges not included, other transaction costs, taxes, premiums, and fees may apply and could well exceed the 2.09% gross profit from this arbitrage. 




Stuck on Zero's picture

The problem is that you cannot arbitrage paper for physical. 

Free_french's picture

Difficult question we do not have an equivalent...

In forest we use :

"Attention..... dessous"

"Beware.... under"


As celts the only fear is that "sky is falling upon our heads"

gjp's picture

Precisely, HH.

Can't stand these financial crooks playing holier-than-thou about the public sector, while they are even worse theives.  Far worse.  It's really just two sides of the same coin (govt/finance), but one side is a lot fatter.

El Oregonian's picture

Marie Antoinette: "Let them eat Bitcoins".

Salah's picture

The French could turn it around here... but they REALLY NEED TO READ & STUDY & PRACTICE 

Dr. Bryan Caplan's "The Idea Trap"

It's totally apropos in their case.

McMolotov's picture

French bitcoin = Royale with bits?

And you know what they put on Freedom Fries in Holland instead of ketchup? Mayonnaise. I seen 'em do it, man, they fuckin' drown 'em in that shit.

rqb1's picture

All they need is DSK to get back to work!  His parties must have contributed to GDP.

1100-TACTICAL-12's picture

Mayonnaise......On fries.... I think we still hang people for that shit here.

TeamDepends's picture

What France needs is a cheese-backed franc.  Think about it.

Joe Davola's picture

Switzerland's looking to poke holes in your theory.

booboo's picture

Brie that as it may the French are still smelly.

debtor of last resort's picture

Chateau Migraine has the future in France.

Dead Canary's picture

The Greeks are already Feta up.

Bangin7GramRocks's picture

And she stepped on the ball..........

Dead Canary's picture

Muffy, that story is just darling.

Mototard at Large's picture

...or maybe red wine?  That I could get into!

Ivanovich's picture

Another Year in the Merde.

Dr. Engali's picture

On the brink of a depression? When did we leave the current depression?

McMolotov's picture

Yes, which makes this part even more hilarious:

The interesting thing is that the government share of GDP in France has relentlessly risen regardless of whether a right or a left leaning party was in power.

Exactly what's happened in the US — so France obviously didn't spend enough, according to people like Paul "Special K" Krugman. Spend moar! Moar! MOAR!!!

gjp's picture

Charles Gave has been relentlessly down on continental Europe and a champion of Anglo-Saxon 'innovation' / financial fraud / Bretton Woods II etc. since early 2000s at least.  Just another silver spoon sycophant toady.

Why the treatise on France?  How about a global perspective for a global financial system that is obviously rotten at the very core?

Ghordius's picture

+1 reminds me of this guy that said: "And why beholdest thou the mote that is in thy brother's eye, but considerest not the beam that is in thine own eye?"

to which the interlocutor replied: because he is a damn frog, that's why! or something similar...

nevertheless I agree with the article on one main (paraphrased) point: either France makes itself more confortable for small and medium enterprises or this pain will increase

trader1's picture

isn't Charles Gave from France?

Ghordius's picture

small correction: French, with a capital letter. it's an English language convention that nationalities are always capitalized, and I break often the capitalization conventions Because It Annoyes Mightily Some English Speakers

Vashta Nerada's picture

I think I see the problem:

France is extremely unusual in that government spending accounts for a full 57% of national output

If anyone needed proof that Keynesian economics is doomed to failure, here it is.  The only difference between what is happening in France (and most other western nations) and what happened during the hard money era is the size of the bust.  Having the government spend your money for you only centralizes the foolish choices and takes the control from the individual's hands.

spankfish's picture

Double dip depression?  Is that like double dipping a chip in the dip... just plain old nasty.

dracos_ghost's picture

Queue DSK for the double dip double entendre....

Joseph Jones's picture

Many times I attended the largest annual convention in Las Vegas.  By the last day of the show in 2011, show management and Las Vegas power brokers had spread the rumor (AKA lie) that show attendance returned (almost) to pre-recession numbers.

Do they lie?  Do their lips move? 

Anyone with eyes could see numbers were still horribly depressed compared to early-mid-00s.

realtick's picture

nice charts

come to think of it, France GDP YoY% gives us a preview of what is going to happen to US Initial Claims data

azzhatter's picture

I don't understand the srticle- it says France but it also says last truly communist country so it's clearly about the US.