Friday lay day – Eurozone, lessons have not been learned

It’s my Friday Lay Day blog and my head is firmly in the 1960s and being helped along by music from the early 1970s. I’m currently trying to trace the evolution of intellectual ideas in the French Ministry of Finance as it gained ascendancy in the late 1960s over the Planning Ministry, which was Keynesian in outlook. It is no easy task. The current situation in Europe is approaching laughable in a sort of tragic sense, given the millions of people who are unnecessarily unemployed as a consequence of the incompetence and folly of the political class. The latest manifestation of this folly was the Monetary Policy decision released by the European Central Bank yesterday (December 3, 2015) which was met with derision from commentators and the financial markets responded by pushing the value of the euro up, which will further exacerbate the ECB’s claim that it wants to increase the inflation rate.

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Time for George Osborne to expand discretionary deficit spending

The British Office of National Statistics released the latest – Public Finance, October 2015 – last week (November 20, 2015), which showed that the British fiscal deficit has grown by around 16 per cent in the past 12 months and is around £2.2 billion higher than was forecast by those who care to forecast such things. The hysterical press reaction was quite amazing. For example, the so-called progressive UK Guardian described the results as “shock UK deficit figures” and said that the recorded deficit was the “worst … for six years”, despite the fact that any informed dialogue about fiscal balances would eschew the use of terms ‘worst’ or ‘better’ to describe such outcomes. Meanwhile, the US press went haywire with claims of a scandal of what effectively amounts to the government hiding revenue from itself. Quite amazing.

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The massive Eurozone real income losses continue to mount

Eurostat released the third quarter National Accounts data for Europe on Friday (November 13, 2015) – GDP up by 0.3% in the euro area and by 0.4% in the EU28 – which showed real GDP growth slowing in the Eurozone (down from the slug-like 0.4 per cent) and nations such as Finland and Estonia (one of the previous ‘poster children’ for austerity) heading into basket-case territory. Finland contracted by a sharp -0.6 per cent in the Third-quarter 2015 and has been in recession since the Estonia contracted by 0.5 per cent as did the beleaguered Greece. Portugal stagnated at zero growth. The so-called European recovery is looking distinctly wan! As at the third-quarter 2015, the Eurozone as a whole as still not reached real GDP levels equal to the peak in the March-quarter 2008. The overall 19 economy monetary union is still smaller than it was before the crisis began some 7.5 years ago. But to envisage how large the losses are of the failure of the policy makers to quickly restore growth, we have to also estimate where the Eurozone economy would have been had the GFC not occurred and pre-GFC growth rates were maintained. Then we have staggering losses of national income to consider across the failed monetary union. A very damaging folly has been inflicted on the people of Europe as a result of the neo-liberal Groupthink that dominates policy making.

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European Commission forecasts – a denial of their only effective policy tool

In Greece, the national unemployment rate has been around (or higher) than 25 per cent since 2013 so it is little surprise that mortgage defaults has spiralled and people are selling of family heirlooms to wealth antique dealers in Switzerland to cover daily costs. A Geneva-based dealer told the Financial Times in June (Source) that “For buyers there are opportunities that only come along when there’s a real economic upheaval . . . in Greece it hasn’t happened since the second world war”. So the vultures are enriching themselves as a result of peoples’ misery. Its the market! No it isn’t. Its an incompetent government looking after themselves and allowing their citizens to go down the drain. Just yesterday, the Greeks have agreed to tougher foreclosure measures (as part of the bailouts) which will see impoverished Greeks lose their last vestige of dignity – their homes. And the latest European Commission – Autumn Economic Forecasts – (released November 5, 2015) portend a very sorry future for Greece and the Eurozone generally.

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US economy slowdown – not likely to be a trend

Last week (October 27, 2015), the British Office of National Statistics published its – Gross Domestic Product Preliminary Estimate, Quarter 3 2015 – which revealed that the British economy is slowing and heading back into recession under current policy settings. The annual real GDP growth rate declined for the third successive quarter as the impacts of the world slowdown and domestic policy austerity start to take their toll. Later in the week (October 29, 2015), the US Bureau of Economic Analysis released their estimates of – Gross Domestic Product, 3rd quarter 2015 (advance estimate) – which showed that the US economy has also slowed rather appreciably in the third quarter and “increased at an annual rate of 1.5 percent” after having increased by 3.9 per cent in the second-quarter of 2015. We will have a better picture of the state of the US economy on November 24, 2015, when the estimates are revised based on updated data. The most obvious reason for the slowdown was the sharp drop in private inventory investment, a slowdown in exports and investment. Households maintained a relatively stable saving ratio – 4.7 per cent of disposable personal income compared to 4.6 per cent last quarter.

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Public R&D austerity spending cuts undermine our grandchildren’s future

Growth in material living standards, which is just one measure of overall (average) prosperity and contestable at that, depends on productivity growth. How national income is distributed, real wages growth in relation to productivity growth, and the employment rates also impact on how this average is reflected in the fortunes of individuals. Strong productivity growth is only a necessary condition for improved material living standards. In this period of fiscal austerity with suppressed overall growth rates and labour market deregulation that undermines working conditions and reduces the incentives to invest in best-practice technology labour productivity is falling – as will living standards in the coming years. The world is locked into an idiotic race-to-the-bottom. It is a curious period really. The hypocrisy of governments, aided and abetted by the right-wing think tanks, who claim they are cutting into public spending to reduce the drain on living standards of our children and grandchildren, is clear to see. What they are really doing is undermining the future prosperity of the next several generations at the same time that they push millions into unemployment and poverty now. Why are we so stupid that we tolerate this nonsense?

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The Eurozone Groupthink and Denial continues …

I have been going back through my snippets library looking at what economists and politicians said back earlier in the crisis and comparing the predictions with reality to try to understand better why Europe is lagging behind. I have been compiling national profiles for various nations lately to ensure I remain cogniscant of the detailed developments that have been occurring. It takes some organisation. I have been concentrating by interest on Finland, Spain and Portugal lately. It astounds me when I read or hear that the Eurozone has been a success because the currency is stable. Even that last statement is false given the monetary union is fighting deflation at present with recessed output levels and entrenched mass unemployment. The current statements coming out of European leaders accord almost directly with the same sort of things they were saying in 2010 as the region was plunging deep into recession. It seems that they have learned nothing. Some of the past leaders have retired with handsome pensions and will not be held to account for their policy incompetence. Others remain in office and their public statements demonstrate that they cannot see beyond the blindness of the Groupthink that defines the patterned behaviour of the elite European policy-making institutions.

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US labour market – the recovery is now stalling

The US Bureau of Labor Statistics published the latest – Employment Situation – September 2015 – on October 2, 2015, and the data shows a weakening labour market overall. At least it will silence the squad that are calling for higher interest rates for a time. The data shows that after 7 years of recovery mode employment growth is now starting to slow and it is likely that the change in employment in 2015 will be less than the annual change last year. All the main indicators were weak – employment, participation fell, hours of work fell, earning growth was zero – which is consistent with an overall slowdown. In seasonally adjusted terms, total payroll employment increased by 142,000 in September while the Household Labour Force Survey data showed that employment fell by 236 thousand. In the first 9 months of 2015, the average monthly change in non-farm payroll employment has been 198,000 whereas the corresponding figure for 2014 was 260,000. The unemployment rate was unchanged at 5.1 per cent but would have been higher had not the participation rate fallen by 0.2 percentage points to 62.4 per cent. The participation rate is now at its lowest level since September 1977 The other sign that the labour market is weaker is that the Employment-Population ratio fell slightly to 59.2 per cent (from 59.4 per cent). There is also evidence that a significant proportion of the jobs that are being created are in low pay, precarious areas of the labour market.

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Why banks are pushing the US central bank to increase interest rates

A few weeks ago I wrote – US Federal Reserve decision correct – there is no ‘normal’ – and suggested that the reason Wall Street and other well-to-dos were busily invading the media at every opportunity berating the US central bank for not increasing interest rates was because they had a vested interest in rates rising. They massage their call for higher interest rates in terms of global concerns for inflation (mostly) but just below the surface (they are mostly pretty crude in their advocacy) is the real reason – their own profit bottom line improves. On October 1, 2015, the Bank for International Settlements published its Working Paper no. 514 – The influence of monetary policy on bank profitability. The research demonstrates my very point. They find that when the short-term interest rate rise (that is, the policy rate set by the central bank) “bank profitability – return on assets” also rises. They also find that this “effect is stronger when the interest rate level is lower”. The overall conclusion is that “unusually low interest rates … erode bank profitability”. So forget all the spurious arguments about inflation risk etc that the financial media (who are really just ghost writers for the top-end-of-town) write ad nauseum. The real reason the Wall Street lobby keeps pushing for rate hikes is because they want more profit.

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US Federal Reserve decision correct – there is no ‘normal’

Last week (September 17, 2015), the US Federal Reserve Bank took the sensible decision to leave the US policy interest rate unchanged. Nine of the ten Federal Open Market Committee (FOMC) voted accordingly. One dissenter wanted rates to rise by 25 basis points. The central bank made the correct decision, even if you might like to question their reasoning. The decision has not pleased the financial markets who have been baying under the moon for months if not years for interest rates to return to higher and more stable levels. There is no surprise in that. They make more profits under those conditions and when there are low rates and higher uncertainty about their direction (and adjustment speed), profits come less easily. Further, they long for what they call “normal levels” of interest rates despite the fact that reality changed with the GFC and we now know that monetary policy is relatively ineffective as a policy tool for controlling or influencing aggregate spending. And it is typical that they ignore the millions of people who remain idle in one way or another and are enduring flat real wages and rising poverty rates. There is no old “normal’ now. Things have changed.

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