Saturday, 22 September 2018

On deficits, clocks and toys with no joy

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So we’re in for yet another “crunch week” for the eurozone; I can’t count how many of those we have had since the powers that be foolishly declared that if Greece defaulted it would mean the end of the single currency and that therefore it would never default.

Anthony Peters, SwissInvest Strategist

Since then, the authorities have been stony-faced about the varying critical issues which have risen and fallen and, as Suki Mann of Societe Generale pointed out not so long ago, although they have been slow to react and permanently behind the curve, so far they have successfully kept the lid on the worst of the crisis.

I had a longish conversation on Friday with a British portfolio manager who is based in Frankfurt. It is intriguing how he regards London as being in the clutches of traders and economists who are unable to grasp that the Grand European Project is bigger that any individual nation and that the political will to fight one’s way out of the current mire will ultimately be too strong to resist.

Some economists will argue that the the Debt Clock is a pretty blunt instrument and a silly toy but Nicolaus Copernicus and Galileo Galilei were not wrong simply because they worked with hand-made telescopes

I, on the other hand, have always contended that politics can keep economic realities in check for a certain amount of time but that in the end the latter will ultimately outlive all the group photographs, the declarations of solidarity and governments’ ability to write cheques backed by other peoples’ money, especially if the other people haven’t been asked yet if they want to give it.

In the end, I conceded to my chum that we probably have both been brainwashed to some extent as I, London-based as I am, drift ideologically further to the right and he, in Frankfurt, drifts further to the left. 

Ticking time bomb

However, one thing we do agree on is that the United States is living on borrowed time. According to the US Debt Clock the national debt now stands at around US$15.7trn and the deficit is US$1.326trn. Federal tax revenue is falling and according the Debt Clock toy – I guess it would be defined as an “app” now – Federal fiscal revenues are running at US$2.251trn but spending at US$3.577trn which gives us the famed US$1.3trn of annual budget deficit.

Forget Debt/GDP ratios – I find them highly disingenuous – and let us look at the fiscal revenue/expenditure ratio; at this moment in time the US government is borrowing one in every three dollars it spends. Getting excited about Apple beating earnings forecasts – along with pretty much every single company listed on the NYSE – cannot detract from this.

Sure, some economists will argue that the the Debt Clock is a pretty blunt instrument and a silly toy but Nicolaus Copernicus and Galileo Galilei were not wrong simply because they worked with handmade telescopes. It was the principles that they established; the detailed calculations followed and in some cases are not even now completed.

US equities are now trading at their highest level since the financial crisis began in earnest in 2008 – just as a reminder, the S&P hit its low on March 6 2009 at 666.79 points and it closed at 1,403.36 on Friday night – which looks very pretty on a chart but a number of the uncomfortable realities which are plaguing Europe will quite inevitably resurface in the States in due course.

France will be a very good test bed for the Americans as it too is a country which has sailed along, never questioning the justifiability of persistent deficit spending. French presidential hopeful Francois Hollande is beginning to draw lines in the sand with respect to German insistence on fiscal rectitude and I suspect that we can all see an uncomfortable squaring-up of the two European powerhouses ahead.

The ILO has joined the fray with its study on global unemployment which it regards as being at “alarming” levels and unlikely to begin improving significantly until 2016. Not surprisingly, it blames the tight austerity programmes for the state of the labour markets and concludes: “This has huge economic costs in terms of loss of skills and motivation, and could lead to human capital depreciation.” Quite so. It goes on “There may also be accompanying social implications in terms of increased social strife, riots, illness, and so forth.” Again, I cannot disagree.

The report was balanced and although it pointed to the effects of austerity, it did no go so far as to suggest a change in the policy. Spanish unemployment is now beyond critical and in France it is rising quite sharply too. However, calling for a divergence from the bitterly painful policies of bringing public expenditure back under control is, in my view, tantamount to suggesting that they eat cake.  

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