By
Daryl Montgomery
:
Much weaker than expected trade data out of China on Friday
indicates more economic stimulus will be forthcoming there soon.
Even bigger stimulus is expected from the ECB as it revs up the
printing presses to bail out Spain and Italy (unless Germany stops
it of course). According to a recent released report, the
recessionary economy in the UK may need massive doses of
quantitative easing to recover.
Exports in China rose by only 1% year over year in July and this
was well below forecasts of an increase of 8.6%. Imports were up
4.7%. For a country that has an export-based economy like China
does, this is a serious problem. Like the U.S., Europe and Japan,
China engaged in a massive amount of stimulus during the Credit
Crisis in 2008/2009, spending $586 billion or 14 percent of its GDP
in addition to cutting interest rates and lowering banking
reserves. This led to a big expansion of local government debt, a
major housing bubble that has yet to burst and consumer inflation.
Apparently, there are unfortunate side effects when governments
apply a lot of economic stimulus (notice you rarely read about them
in the mainstream media).
This time around, China has already cut interest rates twice and
reserve requirement ratios for banks three times since November.
Its economy has slowed for the last six quarters and probably by
much more than official figures indicate (China's economic numbers
should be taken with a grain of salt).
China is still in spectacular shape though compared to Japan,
which had a massive trade deficit in the first half of 2012. Japan
has been economically troubled for 22 years and despite zero
percent interest rates and an unending number of stimulus measures
its economy remains in the doldrums. While all the stimulus hasn't
solved Japan's economic problems, it has led to a debt to GDP ratio
of over 200% (worse than Greece's).
One reason China's exports are doing so poorly is the weakening
economy in Europe. On Thursday, the ECB cut its growth forecasts
and is now predicting the Eurozone economy will contract by 0.3% in
2012. They are still hopeful of slight growth in 2013 however.
Maybe they think it will come from all the money they plan on
printing to bail out Spain and Italy. The Eurozone is basically
tapped out from all the bailouts it has already done in Greece,
Portugal, and Ireland (Cyprus and banks in Spain are now on the
list as well). Greece needs a third bailout and is struggling to
make it through the month until it receives its next welfare
payment in September. The situation there is potentially explosive.
The IMF has stated Ireland will need another bailout by next
spring.
When ECB President Draghi said on July 9th that the central bank
will take any measures within its mandate to save the euro, the
inevitable conclusion was that he was willing to engage in massive
money printing. The amount of money needed for the huge bailouts
that Spain and Italy would require simply doesn't exist so it has
to be created out of thin air. The Draghi proposal is for the ECB
to buy bonds, but the ECB has already tried buying bonds under the
SMP program. The moment the buying stopped, interest rates shot
right back up. This approach is costly and only effective in the
very short term - a typical government program. It won't prevent
the Eurozone's failure, it will merely delay it and make it worse
when it happens.
The UK is not part of the Eurozone, but its economy is also
contracting. Citigroup economists have stated that the UK will need
to print an additional £500 billion and lower interest rates to
0.25% to prevent continued stagnation. Apparently, they don't think
there are serious risks if this approach is taken. Neither did the
Weimar Germans in the early 1920s, the Zimbabweans in the 2000s,
the Chinese in the 1940s, the Brazilians for most of the 20th
century, the Yugoslavians in the 1990s or the Hungarians in 1946.
In fact, countries that create hyperinflation always claim the
risks of money printing are minimal before it takes place. And
there are usually a large number of top economists that support
this view.
There are serious structural problems in the major economies
today. The usual Keynesian quick fixes that have been applied since
World War II no longer do not seem to work, nor will they. These
have led to a world drowning in debt and all debtors eventually
reach their borrowing limit. When this happens with countries, they
then try to print their way to prosperity. History makes it quite
clear that this doesn't work either.
This posting is editorial opinion. There is no intention to
endorse the purchase or sale of any security.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
See also
Greece Borrows From Shiller's Book
on seekingalpha.com