Krugman’s big call… welcome to “a third depression”
G-20 nations promise budget cuts… just not now. Dan Amoss examines the consequences
Despite global slump, steel consumption hits record high… Frank Holmes offers explanation
Plus, Rob Parenteau with one reason China won’t bust… and one reason why it might
This is very disconcerting, fellow forecaster. Paul Krugman is making sense… up to a point.
“We are now, I fear, in the early stages of a third depression,” the Nobel laureate wrote in a NY Times Op-Ed yesterday, dipping his toes into a pool we’ve been sloshing around in for some time.
“It will probably look more like the Long Depression [of the late 1800s],” the Krug continues, “than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.”
We choke on our morning brew admitting it… but Krugman is onto something.
That is, until he follows his comments up with this piece of advice to G-20 meeting attendees: This depression will actually be “a failure of policy… governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.”
Deflation now, inflation later. That much we can agree on. But how are we going to get over a spending binge with even more spending…? And borrowing and spending…? What of the deficits and debt we’re already drowning in?
Krugman’s fear is derived from the lip service the G-20 delegation is paying to “austerity measures” following the summit. They and other “advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016,” reads the headline statement from the weekend meetings.
But in the end, we don’t believe Krugman has anything to worry about. In the opening minutes of I.O.U.S.A., we ran a montage of presidents declaring war on the nation’s deficits and national debt going all the way back to Eisenhower.
To that list we could also add this famous promise in a 2007 Op-Ed in The Wall Street Journal penned by then president George W. Bush: “We can balance the federal budget by 2012. In early February, I will submit a budget that does exactly that.”
(This afternoon we’re also taking part in a meeting of the communications directors of the Blue Dog Democrats in Congress. The Blue Dogs are “centrist’ democrats who are fine with the social agenda of their party, but would like to see it financed properly. Apparently, we’re going to be discussing methods for getting “on message” with the fiscally responsible set… while still maintaining a shred of a chance at getting the candidates who are signing their paychecks reelected.)
“Too many people,” counters our own Dam Amoss, “confuse economic activity, measured by GDP, with economic progress. Progress usually involves rising living standards driven by rising productivity and falling consumer prices; as happened in the U.S. industrialization in the late 19th century.
“The road to serfdom, originally outlined by Hayek, is now taking the global economy down one of two paths:
“Painful austerity plans and deflation that salvage what’s left of today’s currency system by promoting savings and encouraging new capital formation; or endless stimulus injections into economies with the promise of austerity ‘once the economy recovers.’
“The second path one is more likely in my view, because it’s more politically popular — especially once the European “pro-austerity” camp discovers just how addicted their economies are to the welfare state. Hopefully, a critical mass of people who value freedom over the illusion of economic security can move to wean us off today’s frighteningly powerful roles for governments and central banks.
“But based on the decisions we’ve seen in recent years — decisions driven mostly by political considerations — I’m not holding out much hope at this point.”
“Unfortunately, most Western economies are now thoroughly addicted to government spending. Each fiscal and monetary injection into zombie banks will likely have to be larger in order to offset the withdrawal symptoms of losing the last stimulus plan.
“Entrepreneurs figure this game out and gradually withdraw from participating in the economy in a healthy, productive manner. This loss of entrepreneur confidence in the system will ultimately accelerate the demise of all paper currencies. “
Still, if we are all teetering on a global meltdown redux, why did steel consumption just hit an all-time high? The short answer: China.
“At 124 million metric tons, global crude steel output last month was up 29% year over year,” reports Frank Holmes, who will join us in Vancouver for our Investment Symposium in less than a month. “And it was nearly 10% above pre-recession levels in May 2007.
“For the first five months of the year, worldwide production exceeded 580 million metric tons, according to World Steel Association figures. Mills have been running at above 80% capacity since February — compare that to the mid-60%s in the same months of 2009.
“China accounts for close to half of global production — 265 million metric tons so far this year, up more than 20% from the first five months of 2009. China is now on track to consume 600 million metric tons this year, but analysts expect demand to slow in the second half of this year in response to Beijing efforts to put the brakes on runaway growth.
“But that’s a short-term sidebar to the long-term growth story, which is being driven in large part by the rapid middle-class expansion in China, India, Brazil and other key emerging markets.
“Infrastructure specialists at Macquarie expect global steel production to increase by 339 million metric tons per year by 2014, and it says China will account for 59% of that growth.”
“If there is a Chinese derailment to come,” opines The Richebacher Letter’s Rob Parenteau, “it will not be malinvestment that drives the train off the tracks. Rather, an environmental collapse is a true credible threat to the renaissance and revival of the Chinese dynasty.
“The price of leaping ahead by decades of Western-style development in a matter of years has been, and is likely to be for some time, a significant drain on natural resources like water, and a despoiling of the environment on a scale humanity has rarely witnessed. For example, several aquifers below Beijing have already been drained nearly dry as the water table continues to sink from too much withdrawal and too little natural injection.
“16 of the 20 most polluted cities on the face of the Earth are in China, 70% of the lakes and rivers are polluted, with overgrazing leading to significant desertification of grasslands. When you go for breakneck growth at all costs, such extreme outcomes are both possible and likely: Pollution is estimated to cost China roughly 9% of GDP per year.
“At one point, and perhaps soon again, there were active plans within the Chinese bureaucracy to nuke a hole in the Himalayas so water from the Tsangpo River in Tibet could be redirected eastward to the coastal cities. Since the Tsangpo is a major water source for India and other adjoining nations, if China were to claim water rights and usurp it from downstream nations, it is likely either large-scale migration would be required downstream or war would soon break out.”
Rob deserves a quick nod for his apparent flash of notoriety among etymologists and other word nerds this morning.
The blogger Barry Ritholtz, who will also be appearing at this year’s Investment Symposium, issued a correction on his site this morning citing Rob as the best known origin of a new word. “Austerian”: The mutt offspring of “Austrian” and “austerity” and meaning a person of the Austrian school of thought who is in favor of cutting deficits during this global recession.
Clever. And corrected.
All the woes above — and more — weigh heavily on the stock market. Major U.S. indexes lost 3-4% last week.
“Last week, stock indexes were pressed by broken technical support, weakened economies and flaring sovereign debt fear,” notes our options trader Steve Sarnoff. “Money flowing out of stocks has boosted bonds and lowered longer-term interest rates. For equities, overhead resistance is fortified. We could see a decent bounce coming, but overall conditions suggest sellers have the edge, fireworks are ahead and the heat could seriously be coming down on buyers. By summer’s end, stocks may be brought low.”
So just last night, Steve issued a put recommendation on a popular software stock that’s looking a bit too top-heavy. Get his latest pick — and all his famous Sunday alerts — by subscribing to Options Hotline, here.
Thus gold is once again flirting with record highs. It rose as high as $1,262 this morning and goes for a few bucks less as we write.
“I am a retired police officer,” a reader writes. He’s referring to the underbudgeted city of Wichita, where there will soon be a “false alarm tax” enacted.
“I started in 1975 as a military policeman and retired in 2004 from my major civilian police career, with some gaps in between cop employment. During my time, I don't know how many thousands of alarms I responded to. Not one of them was an actual crime in progress — they were all false.
“In my later years, my major fear was actually responding to a crime in progress, as the situation probably would have given me a heart attack from the surprise! All the false alarms were from carelessness or really cheap and faulty alarm systems. People should be fined after a few false alarms.
“By the way, false alarm fines are not new. False alarms are a huge drain on a police department budget.
“Love your writings, keep it up!”
“If you have an alarm, why should I pay for the cost of scrambling the EMTs and firetrucks?” another reader asks, in favor of the tax. “This is a good trend, not a bad one… I just needs to be carried out in extremis.”
The 5: You get the prize for our first ever “tax in extremis” advocate.
“Latest reports put the total G-20 expenditures at $1 BILLION-plus for this gathering of world-class pinheads! If you could divide that amount by the number of protesters, it would become a viable option to just pay each one of them about $10,000 to stay home and call it good. You'd still have $900 million left over if there were 10,000 protestors, and businesses and schools could still be open.
“My fee for this consultation would be only $1 million — cheap at twice the price.”
The 5: That billion-dollar price tag is just Canadian expenses. Who knows how much they all spent getting there. The operators of Air Force One don’t exactly hit up priceline.com before they leave Washington.
“Getting the presidential entourage and its armada of equipment to China and back,” we noted in the introduction to Empire of Debt, commenting on a trip former president Clinton took, “the Air Force flew 36 airlift missions on Boeing 747, C-141 and C-5 aircraft. The Pentagon’s cost of the China trip was $14 million. Operating Air Force One alone costs $34,000 an hour.
Nor have they accounted for the cleanup, yet. “In 2003,” we also noted, “when then President Bush deigned to visit the British Isles, an additional 5,000 British police officers were deployed to the streets of London to protect him. Parks and streets were shut down. Snipers were visible on the royal rooftop. After Bush’s stay at Buckingham Palace in London, the Queen was horrified by the amount of damage done to the Palace grounds. They were left looking like the parking lot at a Wal-Mart two-for-one sale.”
The 5 Min. Forecast
P.S. When we invade Vancouver for our Symposium on July 20, we promise to be a little more respectful to the grounds of the Vancouver Art Gallery across the road from the Fairmont. The museum, you may already know, will host the Reserve-only reception on the second night of the symposium.
Bruce Robertson, our symposium director, told me this morning we only have 20 overflow seats left in Vancouver. We call them “overflow” because we know attendees’ plans change and a certain percentage of folks who thought they were going to go can’t make it. So we sell a few extra spots, just in case. Only 20 of those seats are left, so if you’re still thinking of coming, you’d better call Barb Perriello at (800) 926-6575 … fast.