YOU are intelligent, educated, and keep up with current events. Yet all of your experience does not help in genuinely understanding what explains the global crisis. June 30, 2012, is another turning point as was June 1st.
You go to the bank and borrow money to buy a condominium. If you do not pay the loan, the bank takes the property and sells it to someone else to repay the loan. Simple.
A bank borrows money from depositors and loans the money to other people. If the other people do not pay the loans, the bank may not have enough cash, liquidity, to pay depositors’ withdrawals. Another bank must come in with cash, assume the loans and assume the responsibility of paying the depositors. Also simple.
There are constant “debt crises” of this type but they are always resolved. In extreme cases, government or private deposit insurance protects the depositors. The bank dies when its assets, the loans, become worthless and no one wants to buy them.
Historically, governments (mainly monarchies) borrowed money from banks to fund wars or economic exploration. Win the war, take the other king’s money and the loans were paid off. Find a new, rich country like the Philippines, set up trade, make money, and pay the loans back.
Financial crises, on the other hand, are always the result of governments devaluing the currency. Borrow a coin made of 100 percent gold and try to pay it back with a coin made of 50 percent gold, the lender now wants two of the less-valued coins. What used to cost one coin now costs two; it is called currency induced cost-push inflation.
On August 30, 2008, the US Federal Reserve had assets of $870 billion. On May 30, 2012, its assets were $2.870 trillion. The increase of $2 trillion came from just adding $2 trillion to the Fed’s Assets Column on its balance sheet, sort of like if there was a special button on your ATM machine that let you set your balance at whatever amount you desired.
Whenever a bank needed extra money because its loans were bad like in the housing sector, the Fed loaned them the money and, therefore, put all that $2 trillion into the economy. It was supposed to get economic activity going again. Except, because the US government has a huge budget deficit, the banks loaned the money they borrowed back the government.
June 1st was the wake-up call that the policy was a failure. By June 30th, the central banks will either walk away, letting dozens of major banks and a couple of countries go out of business, or they will put more money into the system.
Between now and June 30th, the government of Greece will run out of money. Spain’s banks and governments will by then need at least $500 billion to survive. Both the European Central Bank and the Federal Reserve will meet and decide what to do.
There is very little major global economic activity. This new round of money infusion will not create economic activity any more than it did between 2009 and 2012. June 30th will mark the day the global economy starts going into a recession with nations seeing economic activity shrinking. This is because of three years of population growth and three years of increasing government deficits. Governments have no monetary power nor can afford to “stimulate.”
That June 30th date will also mark the beginning of major price inflation although the inflation will not start becoming apparent for 12 to 18 months.
The reason there has been low inflation for three years was the belief that increased economic activity could soak up all the excess cheap money. In a year, that belief will be totally destroyed. Commodity prices will go up. Stock markets will rally and emerging-market currencies will go to levels not seen since 1997.
This will all become clear by June 30th. Mark your calendar.
Friday, 8 June 2012
Wednesday, 6 June 2012
IT is now early morning Manila time, Saturday, June 2nd. The global financial markets just closed for the weekend. Filipinos—from Malacañang to the most humble provincial dwelling—are fast asleep or perhaps finishing the last “one for the road,” unaware that when they next see the light of day, the world will have changed.
The release of economic numbers and the global financial markets performance yesterday tells the global performance for the first half of 2012. It is worse than not good.
US unemployment numbers proved that anyone who believes the US economy is improving needs serious psychiatric intervention and heavy medication. There is no significant job creation. One quarter of all US home sales are foreclosed pieces of property. An important predictor of future economic activity is the PMI or Purchasing Managers Index. This survey tells if companies are going to spend money in the future. Germany’s just-released (on Friday) PMI dropped at the fastest rate in three years. For all of Europe, the PMI is at the lowest level in three years.
US consumer spending is up. However, personal income is not up, meaning that new spending is coming from new debt, the last thing the US consumer can handle. When you are borrowing money to buy food, shoes and to pay bills, you are in deep trouble.
Western stock markets collapsed on Friday. Germany’s (economic star of Europe) market closed down 3.42 percent. The US Dow Jones fell 2.22 percent and has given back all the gains made in 2012.
Crude oil was down over 3 percent and wheat prices fell more than 4 percent. Gold was 3.7 percent higher.
Looking for safe haven? Investors can loan their money to the US government for 10 years at the lowest interest rate in history, 1.47 percent, guaranteeing an annual purchasing power loss to inflation of over 1 percent. The PHL 10-year bond rate is 5.5 percent.
All this current financial carnage is not about Greece or Spain. They are the symptom, not the disease. Note this fact. The 10 largest debtor nations have total debts of over 300 percent of the total global GDP, which means that debt can never be repaid. Investment guru Marc Faber says there is 100-percent chance of a global recession within six months. That clock started on June 1.
While ignoring the somewhat manipulated government data, PHL can experience sustained economic activity.
UBS bank out of Switzerland analyzed the balance sheet of 22 emerging markets. A balance sheet measures assets and liabilities; in other words, financial quality and stability. Uniquely, they measured not only government and corporate, but also personal financial soundness. Of the nations examined, including China, Brazil, Mexico, Thailand, South Korea, Turkey and Taiwan, only five countries were considered low risk: Indonesia, Malaysia, the Philippines, Peru and Russia. Then projected economic growth was factored in leaving two “winners”—Indonesia and the Philippines.
Nations where economies are freezing again have no choice but for governments/central banks to provide more stimulus, more bailouts, more low-interest rates, and more money printing to avoid immediate and total financial failure.
But there are going to be a few favorable economic and investment hot spots. UBS told us where to look.
After months of verbal LBM from governments, policy-makers and bankers in the US, Europe, Japan, China, India and others, the hard wall of economic reality came crashing down and the financial markets responded properly.
Loan money at 1.5 percent to debt-burdened Western governments in fiscal decline or to an improving and net-lender PHL government at 5.5 percent? Buy the stock of companies struggling to survive or PHL companies that are continuing to show double-digit profit growth?
You figure out where the money is going to go. All stock markets will go up and down. Most economies sputter and jump. But June 1, 2012, is when the large economies started back down and PHL received the advantage.