Charles Haslewood Shannon ‘The Pursuit’.A look at the euro futures chart indicates something interesting is going on, the March of the Austerians!
Here is the EuroFX (EC,CME) weekly futures contract chart from TFC Commodity Charts:
The downdraft in the euro relative to the dollar has given the Germans a competitive export advantage.
Jean-Claude Trichet, head of the European Central Bank, last week cited this Wirtschaftswunder as evidence of durable recovery in Europe. It is no such thing. The OECD’s leading indicators for June rolled over in Italy and France, as well as China and India.
The IMF expects Spain’s economy to contract by 0.4pc this year. It has lowered its forecast for the eurozone from 1.5pc to 1.3pc in 2011. “Downside risks to the recovery have risen sharply,” it said.
The ECB is barely on speaking terms with the IMF – the “Inflation Maximizing Fund” as it was dubbed in a Bundesbank memo. “The IMF has not caught up to the reality in Europe,” said ECB über-hawk Jürgen Stark on Friday.
Beware, this is the same insular ECB that raised rates in July 2008 on the eve of the Lehman crisis when half of Europe was already in recession, mistaking the deflationary oil spike for an incipient 1970s inflation spiral. Can one ever trust their judgment again?
Yes, Germany is on the cusp of EMU “outperformance”, but that is more curse than cure for Club Med laggards. Germany is benefiting from a currency that is as misaligned as China’s yuan, though this mercantilist advantage is disguised within Europe’s monetary union. Crudely, Germany is doing to Spain, Italy, and increasingly France, what China has been doing to the rest of the world – but more so – by holding down its exchange rate.
In Europe’s case, this captive arrangement is written into EU Treaty law. This is not a German conspiracy. The German people never desired the euro. The countries that are now caught in the EMU trap were the ones that foisted the project onto Berlin.
Be careful of what you wish for, eh?
Events are measuring the success or failure of the ‘Great Hedges’ created by consuming countries in the early 1980’s to offset rising real energy costs. Bubble- inflating credit expansion in Japan and the US (Reaganomics) directed toward finance assets has failed – and is failing despite the substitution of government for finance credit. Extending credit as a substitute for (energy- driven) labor earning power works … until it cannot any more.
The European currency union has also failed. The EMU has conferred an advantage to Germany but has done so at the expense of Ireland, Spain, Italy, Greece and Eastern Europe. Either side of the ‘preferred currency’ equation such as dollar/euro is fatal as no currency can do the same work – and offer the same productive output – as can petroleum. This makes the currency analog of ‘production’ less valuable than the oil that drives it. Once a currency is perceived to represent the materal rather than what the material leverages, production evaporates along with final demand as that currency is hoarded.
Any eurozone trade advantage is constrained by the dollar strength that is a proxy for oil scarcity. German productivity increase makes oil more scarce and the dollar stronger; at some point the dollar becomes too valuable to trade for German – or anyone else’s – goods. In the same manner as credit expansion, currency advantages work … until they cannot any more.
The deregulation hedge (in the US and China) has fallen irrelevant as what was deregulated was consumption- driving finance growth. Deregulated America removed impediments to real estate expansion while the deregulated Chinese filled the newly created spaces from sea to shining sea with junk.
All the hedges have accomplished has been to temporarily redirect consumption from the ‘Commons’ to favored groups or within those groups. The tactic that confers advantage in the current energy- constrained environment is export mercantilism (which is policy in Germany, Japan, SE Asia and China). This creates energy- consuming gadget exports analogous to OPEC’s fuel exports. The mercantilists succeed at their customers’ expense.
OPEC exports the heroin, OGEC (the Organization of Gadget Exporting Countries) exports the syringes.
Cue the ‘March of the Austerians’!
The Austerians insist that the world’s bailing days are done. Everything will return to ‘normal’ given the magic of liquidation (of sufficient working people, IE; customers) :
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
-Andrew W. Mellon
“As regards the economy, the idea that austerity measures could trigger stagnation is incorrect. I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”
-Jean-Claude Trichet
If the Austerians represent ‘moral hazard’ sans morals, the Keynesians suggest something different:
It has been astonishing and infuriating, as the economic crisis has unfolded, to watch America’s political class defining normalcy down. As recently as two years ago, anyone predicting the current state of affairs (not only is unemployment disastrously high, but most forecasts say that it will stay very high for years) would have been dismissed as a crazy alarmist. Now that the nightmare has become reality, however — and yes, it is a nightmare for millions of Americans — Washington seems to feel absolutely no sense of urgency. Are hopes being destroyed, small businesses being driven into bankruptcy, lives being blighted? Never mind, let’s talk about the evils of budget deficits.-Paul Krugman
In sum, the problem with monetary deflation (“internal devaluation”) is that it leaves the existing dysfunctional tax structures in place. The main issue in Eastern Europe and beyond over the coming years will be whether economies can free themselves from the twin burden of heavily taxed wages and inflated housing prices, while avoiding an overdose of needless austerity. The tax structure needs to be changed – along the lines that most countries in the West expected to see a century ago.
The new- old Whiz kids on the economic block, the Modern Monetary Theorists or Chartalists suggest some fine tuning:
The “sectoral balances approach” (frequently attributed to Wynne Godley) decomposes financial stocks and flows by virtue of a tautology. Every financial asset is also some entity’s liability. The sum of all financial positions is by definition zero …
… The usual argument goes something like this: In the aftermath of a terrible credit bubble, in most countries, the private sector is desperate to “delever”, or reduce its indebtedness, which is equivalent to increasing its net financial position. As a matter of pure arithmetic, equation 8 must always be in balance. If the private sector of a country is to force the left-hand term positive, the country must either run a current account surplus (e.g. by exporting more than it imports) or else its government must run a deficit. Some countries may “export their way” to financial health, but not all can, since every current account surplus must be matched by a deficit elsewhere. If we put “beggar thy neighbor” strategies aside and set the current account to zero, any improvement in the financial position of the private sector must be offset by a deficit of the public sector.
This is true by definition. Once the terms have been defined, there is nothing to argue about. If we want the financial position of the private sector to improve (defined as increasing total financial assets less liabilities), and we consider a country whose external account is in balance or deficit, then the public sector must run a deficit.
-Randy Steve Waldman
Who is right? The answer is me. I’m right, the deflationary situation will continue to grind on as deflating economies cannot afford more investment (on high- tech whizmos) required to obtain less (increasingly inaccessible) petroleum. Without adequate petroleum flows there is no ‘modern’. Modern is not an human- scale inevitability, it is a style or fashion, like cloche hats or arugula salads with goat cheese. How finance interprets credit contraction today is intentionally misleading. There are decreasing investment opportunities across the board. Almost all of today’s investments are simply more innovative ways to encourage more people waste more petroleum.
With 6+ billions in the world the potential petroleum demand is absolutely unsatisfiable under any conceivable set of circumstances. Those 6+ billion certainly speak to the incomprehensibility of ‘Peak Demand’!
Cutting labor purchasing power saves energy but throttles direct investments in conservation strategies which cost as much to implement as do investments in waste. The Austerian marionettes disingenuously avoid the issue of allocating away from wasteful consumption. The outcome is … events will dictate the outcome! In the long run we are all dead! So are all the economies!
If the Austerians have a strategy to move away from consumption as the basis for for any sort of ‘modernity’, I would like to see it. Instead, Austrian economic- austerity is another intellectual shell- game, a disingenuous rationalization. Since the likely Austerian policy outcome is massive deflation and collapse, what they have cornered is the ‘blame game’: comes the time they will sit back and blame outcomes on the Keynesians.
The Keynesians are on much more solid ground as the class war expressed against those at the bottom of the economic food chain (customers) is ipso- facto self- defeating. EVERY aspect of transactional economics requires bottom- up investment, even (especially?) subsistence agriculture! The defect in the Keynes argument lies with the ‘What’s next?’ aspect of it. What Michael Hudson suggests is no panacea; Western economies’ tax structures cannot and have not addressed fuel shortages which are beggaring the European and American auto consumers even as they race out to buy brand- new (tax- subsidized) gas guzzlers. There has been over a year of extraordinary stimulus with little or no accompanying restructuring or finance liquidation. Any plan to use the stimulus opportunity to cost alternative energy use investments has failed to materialize. A half- year of global GDP has been ‘stimulated’ toward the finance sectors with lots of (surprisingly) disgruntled bankers/financiers with much of the developed world’s citizens poised at the edge of financial catastrophe. If another half- year’s worth of GDP is expended, how does this add to available oil reserves?
How does further stimulus not ‘stimulate’ an energy price spike and consequent demand eradication?
The energy cost upper bound is the limit of all kinds of stimulus in every primary sector; currency/FX, monetary or fiscal. Our structural consumption pattern sets the upper limit on stimulus. Another $147 price spike will be the poison pill for the developed world’s uber- global economy. The consequent post- spike oil price crash will not represent any kind of colored shoot. Global GDP will halve. Deflation will set in in earnest. Liquidation will ramp into overdrive. As the tide of credit runs out, it will be revealed – even to the most obtuse among economists – what ‘investments’ really represent … energy waste.
The Chartalists miss the point, which is that the balance sheets exist within the energy/resource ledger. Chartalists are constrained by finance’s boundaries. Without massive flows of extremely cheap energy there is little within finance to ‘balance’. Some people think there is an actual debate whether there is inflation or deflation and others seek to debate the Austerians about the need to shrink economic stimulus. All these arguments are pointless. The central banks are irrelevant. So is government intervention in any conventional sense.
The market has been pricing peak oil since 1999. The trend price has risen 600% since that time while dollar inflation within that time frame has been subdued, that is -30%. The past 2+ years have been actually deflationary.
The Cleveland Fed’s median consumer price inflation number(s).
The energy cost ‘tax’ on our economies has been ‘real, baby, real’!
Bubble- blowing finance ‘schemes’ and super- low interest rates, the massive inflation of credit and decades of government ‘stimulus’ have not created one new barrel of oil. Instead, the excess funding has ‘stimulated’ the world into an SUV- giant pickup truck- and air conditioned- enabled world- wide energy shortage. Keynesian stimulus is not new. Our current round began in 1980. Stimulus spending has been directed toward military contractors, sprawl and highway construction. It has driven US GDP but has effectively bankrupted the country at the same time. This stimulus has taken place concurrent with a massive consumption- driven credit expansion that has allowed the purchase of energy priced higher by the credit expansion itself. It is the completion of the credit- energy pricing cycle that is represented by our ongoing economic crisis.
Excess credit bids up the price of oil which creates the problem credit seeks to cure. The ‘inflation’ which Professor Krugman desires is folded into energy prices and those for goods that are directly oil- reliant such as plastics. As Ambrose Evans-Pritchard notes; spending for oil and related- goods is allocated away – taken from – other sectors such as wages. The re- allocation of capital this spending represents is deflation … not inflation – a transaction that the model- constrained establishment cannot perceive.
Events and past strategy are granting the Austerian argument force that it cannot sustain on its own. Given the choice between having jobs and driving, the Western world continues to give the advantages to drivers. What mercantilism represents is a fairy- tale form of leverage that exists only as long as its customers remain solvent. Since mercantilism captures its customers’ solvency, its dénouement is baked into the cake the mercantilists themselves seek to eat.
The only tool that will effect the economy at this point is stringent energy conservation. Nothing else will work. Doing nothing means events will continue to impose energy conservation on the world without regard.
The greatest danger to the economy is not the micro- strategies of different economic debating camps but the structural inability of the finance- obsessed profession to see outside the fortress it has erected about itself. The consequence is growing irrelevance of economists: the economy dies taking its priests/practitioners with it. Energy conservation is not a fad, an opinion, an option or a means to raise revenue; it is a necessity, integral to any sort of relief. Energy conservation cuts consumption, re- balances foreign accounts, reduces demand for credit while supporting thrift, encourages alternative investments and creativity. Substituting human labor for machines reduces unemployment which in turns increases revenue for governments which in turn inproves sovereign finances. Revaluing (real) human output devalues (abstract) finance and rebalances internal economies, it demands smarter people rather than smart machines.
This is what is being defined down: futurism fantasies to relief. This is where our reality lies. We better get used to it.