It has almost been a year since I made my predcitions for 2014. Most of what I said back then, is still relevant today. The real problems in the economy have yet to be tackled, while most people are still looking at the all-powerfull central banks to take responsability for “boosting” the economy. The naivety of the people who believe in this is only surpassed by the cockiness of the Central Bank directives at the centre of this circus of headless chickens. Call me harsh, but that is simply how I see it.
While the Federal Reserve Bank has just put an end to QE, this has been “coincidently” timed with the ECB asset purchase plan, something different in practice, but identical in essence to QE.
In terms of the past years growth and other significant economic data, much can be said about the situation in Europe, U.S.A, and Japan.
The U.S.A, is forecast to grow 1,7% in 2014. Unemployment, has barely moved from where it was a year ago, and the stock market continues to fluctuate. And yet, as always, the Americans are in denial. According to the media, the U.S. boasts one of the strongst economies at this time. That, my friends, is bullshit.
In fact, the recent turmoil in stock markets or cut-backs in growth forecasts, has been blamed on the weakness of the Eurozone, which will likely re-enter a recession. (though according to myself, we never got out of one).
And as always, the optimal response seems to be to just sit back and allow the Central Bank to inflate our currency, debt, purchasing power and all our troubles away. It seems like we have learnt nothing from the Japanese exepriment of the last 20 years.
In fact, to the surprise of many, Japan is “officially” back in recession. And so I wonder; just how bad does the economy have to get before we realize that money printing, devaluation and tax hikes are NOT the solution? Abenomics has not delivered.
The fundamental problems of the western economies, are still as they were a year ago. There is an excessive amount of bad debt that needs to be deleveraged. Only in this way, can resources be freed up for other, more profitable activities. But todays macroeconomic conventional wisdom fights against this. It fears the necessary deflation that arises from deleveraging, and fights constantly against it through credit easing and devaluations.
This, together with the many rigidities in our economy, that have been accumulating over time, are what is preventing a restructuring of the market, and a return to normal growth.
Funnily enough, Spain, has recently been hailed as an example to follow, as it has shown better economic data than most other european countries. I truly wonder, and I will investigate this issue more in the future, if Spains growth is the result of actual progress and changes in the market, or if perhaps, we are simply jumping back on the debt bandwagon, and enjoying its temporary high. As I’ve explained before, currently, the ECB is trying to shove credit down our throats. My worst nightmare, might have come true, and the spanish, who have a particulr liking for debt, are returning to their ways of the pre-crisis era, paving the way for a new crash to occur. One just needs to look at the adverts on television. 500 euros in 15 minutes in your bank account, no questions asked! Debt, debt, debt, cause in the long-run, we’re all dead.
Finally, lets talk Russia and the Ruble. I find what is going on there very interesting. The ruble, seems to be under downwards pressure from the market. The russian central bank, is responding with intervention in the forex market, using its, for the moment, abundant reserves to buy up rubles and increase their price. However, this doesn’t seem to be working as neatly as the theory suggests. The reason is probably, as Nathan Lewis points out, that while the russians are buying these rubles, they are not retiring them from circulation. What I mean is, that base money, is not unchanged, which is why the forex market has not responded to the intervention. In order for the intervention to be effective, the rubles bought must be destroyed.
In conclusion, all the western economies are in a very similar situation. U.S., Europe and Japan, are all in the same sinking boat. They are all suffering from the inept currency manipulation that is going on. This combined with some specific characteristics to each area; in Europe, strucutal rigidities, in Japan, high taxation, and in the U.S. unsustainably high deficits, will inevitably lead to a third “recession”. Or rather, the unveiling that all the Centrla Bank remedies have been but mere banadaids, hiding, but not curing the wound.