Let’s take a break from the political octagon and remember a great man.
Leonard Nimoy, RIP.
(Picture borrowed from ew.com – click here for their excellent article in memory of Spock.)
Let’s take a break from the political octagon and remember a great man.
Leonard Nimoy, RIP.
(Picture borrowed from ew.com – click here for their excellent article in memory of Spock.)
Yesterday I reported some data showing that the U.S. economy is in good shape from a structural viewpoint. Household spending and business investments – domestic private-sector activity – today absorb a larger share of output than they did under the Bush Jr. administration. Government consumption and investment spending has taken a step back, and the foreign trade balance is in better shape today than at the height of the Bush business cycle.
Today, let’s look at the same macroeconomic data from another perspective.
2. A strong growth pattern
In terms of inflation-adjusted growth, the U.S. economy is doing relatively well. GDP growht is not great – but these numbers from 2009-2014 are far better than what we can find anywhere in the developed world:
When an economy grows faster than two percent per year it provides opportunities for people to achieve a standard of living higher than what previous generations have accomplished. Growth below causes stagnation or even a decline in the average standard of living.* From this perspective the American economy is just about keeping its nose above the water. It could do much better, but two factors are holding us back: the Obama administration’s affinity for heavy-handed regulations, and the combined global effects of a China in recession, a Europe in stagnation and a Russia in Ukraine.
In other words, as the sole engine pulling the industrialized world forward, the United States is doing a reasonably good job. More details from the GDP growth numbers reinforce this conclusion. There is, e.g., private consumption which over the past three years has averaged 2.1 percent in annual growth. For 2014, though, the preliminary growth rate was 2.5 percent, a good but not excellent number. Underneath it, though, is some good news: spending on durable goods – household appliances, automobiles etc – has averaged 6.5 percent per year since 2012. This means two things: American families are improving their credit scores again after taking a beating in the trough of the Great Recession; and they are more optimistic about the future.
This optimism is corroborated by encouraging employment, which we will get to in the fourth and last part of this series.
But there is even more good news in the GDP growth numbers. Gross fixed capital formation (GFCF or business investments) has averaged a growth rate of 5.7 percent per year over the past three years. Even better: the growth rate is stabilizing. In the figure above, investments fluctuate wildly:
From thereon the amplitude declines, forming a “confidence cone” where the annual rate stabilizes around 5.7 percent per year. A good number, the stability of which makes it even more impressive.
At the same time, no story of capital formation is complete without a detailed look at what kinds of investments businesses make. Here, again, there is an encouraging pattern of stability. Fixed investment falls into two categories, non-residential and residential, with the former constituting about 80 percent of total fixed investment. In this group spending is divided into structures, equipment and intellectual property products. Again the proportions between the different categories remain stable over time, with the equipment category representing 45-47 percent of non-residential investments.
While homes construction was weak in 2014 – growing by only 1.64 percent – it finished strongly in the fourth quarter at 2.6 percent over Q4 2013. But the residential investment numbers for 2012 and 2013 were downright impressive: 13.5 and 12 percent, respectively.
Finally, a word about government spending. Many people unfamiliar with national accounts make the mistake of looking at total government outlays as share of GDP, whereupon they understandably get outraged about how big government is. However, in order to understand the role of government properly one has to remove the financial transactions from government spending: GDP only consists of payments for work – by labor or capital – or for products. A financial transaction such as a cash entitlement does not pay for work or products, and therefore has no place in GDP.
The government spending included in GDP is payments for teachers in public school, police officers and tax collectors, as well as products such as tasty lunches for middle-school kids and gasoline for the presidential motorcade. It is also investments such as new highways and faster trucks for the postal service.
This kind of government spending has actually been shrinking in the past few years:
All in all, then, the U.S. economy is in reasonably good shape. This does not mean that cash entitlements such as food stamps are not a problem. They are. But with this stable macroeconomic foundation the U.S. economy is well suited to handle reforms to entitlement programs.
Check back after the weekend for the two remaining installments in this series.
* The two-percent mark is arrived at through an adaptation of Okun’s Law. See:
Larson, Sven: Industrial Poverty – Yesterday Sweden, Today Europe, Tomorrow America; Gower Applied Research, London, UK 2014.
The U.S. economy stands as a contrast to the European misery. This is particularly interesting given the fact that the United States has a president that came into office with the most radical statist agenda since the FDR presidency. In fact, President Obama still gets a lot of criticism from libertarians and conservatives for his ideological stance. Some of that criticism is no doubt well deserved, but there are areas where the president has earned more accolades than he gets.
In fact, if you listen to the common conservative wisdom about Obama, we have an economy that is on the verge of being socialized. That may very well be correct when it comes to regulatory incursions and irresponsible environmental policies, including the legislative monstrosity known as the Affordable Care Act. But beyond regulations and the occasional run-amok entitlement program, Obama’s economy has been reasonably good.
Last summer I expressed my appreciation of how well the American economy was doing given the circumstances – see the first, second and third parts – with particular emphasis on the permanent nature of the nation’s economic performance. In the third part I explained:
If the spending growth that drove the GDP number were of a more transitional nature, then I would agree with [the skeptics]. But … the numbers indicate strengthening confidence among consumers and entrepreneurs. It is very likely, therefore that this is a sustainable recovery. Not a perfect recovery, but a sustainable one. We should be happy for it. After all, things could be much worse. We could be Europe.
The most recent GDP numbers, covering all of 2014, point in the same direction. Let us go through them in four parts.
1. The composition of GDP
A healthy economy is heavily dominated by private-sector economic activity. Europe’s welfare states are dominated by foreign trade and government spending. Consequently, unemployment is almost twice as high as here in the United States, GDP is barely growing and the general economic outlook is dystopic.
As shown in Figure 1, the U.S. economy is better structured today than it was 15 years ago. In the fourth quarter of 2014 private consumption constituted 68.1 percent of the U.S. GDP (measured in 2009 chained dollars). That is up from 64.2 percent in Q1 1999. Under the first six years of the Obama presidency private consumption has averaged 68.1 percent of GDP. Compare that number to the 66.9-percent average under Bush Jr.
Another piece of good news is that gross fixed capital formation – business investments in street lingo – have returned to a healthy level of 15+ percent of GDP. At 17.2 percent in Q4 of 2014, investments are far higher than the 12.5-percent share they commanded five years earlier.
On this front the Obama years have not been quite as good as the preceding eight years under Bush: business investments under Bush averaged 17.7 percent of the economy, compared to 15.2 percent under Obama. That said, by global comparison American corporations are fairly confident in the future.
There are two more components of GDP, in both of which the Obama years have been better for the economy than the Bush years:
It is important to understand that these government-spending figures do not include cash entitlements and other financial outlays. To qualify as a GDP expenditure, a dollar must be spent either on compensating someone for work or on making an investment that, in turn, pays people for work. If I buy a share in Coca Cola it does not count toward GDP, but if Coca Cola builds a new production line it does count toward GDP.
With this qualification in mind, we can again conclude that Obama’s first six years have not done too much damage to the economy. On the contrary, the private sector continues to grow, government is showing some restraint and our perennial balance-of-payments deficit is actually in better shape than it has been in 15 years.
There is a lot more to be said about the current state of the U.S. economy. This is the first installment in a four-part series.
Two years ago Caritas, the charity arm of the Catholic church, published a study of the socio-economic effects of the European crisis. They reported:
The prioritisation by the EU and its Member States of economic policies at the expense of social policies during the current crisis is having a devastating impact on people – especially in the five countries worst affected – according to a new study published today by Caritas Europa. The … failure of the EU and its Member States to provide concrete support on the scale required to assist those experiencing difficulties, to protect essential public services and create employment is likely to prolong the crisis.
Their report presented…
a picture of a Europe in which social risks are increasing, social systems are being tested and individuals and families are under stress. The report strongly challenges current official attempts to suggest that the worst of the economic crisis is over. It highlights the extremely negative impact of austerity policies on the lives of vulnerable people, and reveals that many others are being driven into poverty for the first time.
This was, again, two years ago. Since then, things have gotten worse, which Caritas reflects in its 2015 study of the European crisis. Sadly, the report not only accurately presents the socio-economic disaster in southern Europe, but it also makes requests for a bigger welfare state.
Starting with the effects of the crisis, Caritas points to widespread cuts in income-security entitlements and health care, especially in the worst-off countries like Greece, Italy, Rumania, Portugal and Cyprus:
[From] 2011, social expenditure declined … and social challenges have grown further during the second dip of the recession … for example, in a number of countries the number of long-term unemployed losing their entitlements has increased, the level or duration of benefits has been reduced, eligibility rules have been tightened to increase incentives to take up work and this has also led to excluding beneficiaries from some [entitlement programs].
The study also criticizes the hand of austerity that has been particularly heavy on southern Europe:
[The] policy of requiring countries with the weakest social protection systems to impose fiscal consolidation and successive rounds of austerity measures within very short timetables is placing the burden of adjustments on the shoulders of those who did not create the crisis in Europe and are least able to bear the burden.
[Austerity] policies pursued during the crisis in Europe and the structural reforms aimed at economic and budgetary stabilisation have had negative effects with regard to social justice in most countries
This is the problem facing Europe in the next few years. An economic crisis hit; governments responded by slashing welfare-state entitlements and raising taxes; people respond by getting angry – not over the crisis, but over lost entitlements. As a result, socialist parties are gaining strength from Paris to Lisbon, from Athens to Madrid, pushing an agenda of restored entitlements. Caritas reinforces this movement by suggesting that “social justice” – a politically undefinable concept – should be the guideline for post-austerity policy.
A battle cry for more social justice is a battle cry for higher taxes and more income redistribution. Or, as Caritas puts it, “the impacts [of austerity] have not been shouldered equally”. If by “equally” they mean “spread out evenly across the citizenry”, then yes, they are entirely correct. But the reason for this is – obviously – that only a select segment of the population receives entitlements from the welfare state. That is the very reason for the welfare state’s existence.
Caritas and other advocates of social justice would respond that this is a moot point: those who earn the least cannot afford lose the entitlements they have. Others have money, they contend.
If the argument about the frugality of welfare-state entitlements were applied to the United States, it would not stand up to scrutiny. Michael Tanner and Charles Hughes have proven this beyond the shadow of a doubt. Things are a bit different in Europe, though, as Caritas actually show in their study. However, this does not mean that austerity could have been executed differently. More burden on those who do not receive entitlements automatically means higher taxes; as I show in my book Industrial Poverty austerity based on tax increases has even worse macroeconomic effects than austerity biased toward spending cuts. This means, in a nutshell, that if austerity had been profiled according to some “social justice” scale, it would have deprived even more Europeans of jobs and entrepreneurial opportunities.
Plain and simple: Europe must not fall for the temptation of “social justice”. It must charter a course away from collectivism and government “solutions”. The way to the future goes through fundamental, structural reforms toward a permanently smaller government.
While the talks between the EU and the Greek government has bought the euro a little bit more time, there is a growing undercurrent of a debate over the European crisis. More writers are trying to put their finger on where Europe is going and what the continent needs. Arthur Brooks, president of the American Enterprise Institute, looks at demographics and points to some of the deeper social and cultural problems that plague Europe:
[A] country or continent will be in decline if it rejects the culture of family, turns its back on work, and closes itself to strivers from the outside. Europe needs visionary leaders and a social movement to rediscover that people are assets to develop, not liabilities to manage. If it cannot or will not meet this existential challenge, a “lost decade” will look like a walk in the park for Grandma Europe.
There are reasons why a country turns away from family, work and social, demographic and cultural reproduction. Those reasons are closely tied to self determination: when people are demoted from independent individuals to subjects of the welfare state, their desire to assume responsibility for a family weakens accordingly. When government uses economic incentives to steer people toward certain life choices, and away from others, people become less inclined to participate in the reproduction of the society they inherited. They are happy to hand that responsibility over to government – precisely along the lines of the incentives that government has created.
In other words, when government has social-engineering ambitions the consequences of its incursions into the private lives of its citizens reach far beyond what government planners initially would anticipate. Collectivization of people’s daily lives destroys much more than just the economy.
The welfare state is the collectivization vehicle that rolls all over the values that formed the foundation of Western civilization. Proponents of individual and economic freedom chronically under-estimate the destructive force of the welfare state, both short-term and long-term. Brooks represents the view that the welfare state, over its long-term existence, is somehow isolated from the cultural and social traditions and institutions of a society.
The short-term perspective and under-estimation of the welfare state is well represented by former Polish deputy prime minister Leszek Balcerowicz. In the Fall 2014 issue of the Cato Journal, Balcerowicz offers a refreshing explanation of the crisis that caused the Great Recession. After initially attributing the crisis in the so called PIIGS countries to the financial sector, he develops a productive narrative of the crisis where the financial and fiscal sectors interact:
While Balcerowicz is theoretically correct about the quality of the financial-to-fiscal causality, it still remains to be proven that there was enough economic activity at stake to cause such a brutal drop in employment and general economic activity as happened in 2008-2009. Balcerowicz does not offer any deeper insight into the causality, but adopts the narrative that has become the official explanation of how the Great Recession started.
Of far more interest is Balcerowicz’s “fiscal-to-financial” argument. Chronically overspending governments pull banks down with them, especially as the credit ratings of the welfare states start tumbling. I pointed to this in two articles last year, one in April and one in December. I also explain the role of the welfare state behind the crisis in my book Industrial Poverty.
The one point where Balcerowicz stumbles is when to explain why governments chronically overspend. He approaches the problem as a question:
What are the root causes of the tendency of modern political systems to systematically overspend, which results in fiscal-to-financial crises or in chronically ill public finances that act as a brake on economic growth?
He then suggests that the answer to this question “belongs to public choice”. This is an analytical mistake: public choice lacks the methodological power to penetrate the complexity of the welfare state.
Clearly, there is a need for libertarians and other friends of economic and individual freedom to learn how to understand, analyze and politically and legislatively dismantle the welfare state. Without such knowledge they will continue to make near-miss contributions such as the ones by Brooks and Balcerowicz.
But fear not. I have another book coming. Stay tuned.
The answer to the question whether or not Greece will stay in the euro will probably be given this week. New socialist prime minister Tsipras is not giving the EU what it wants, jeopardizing his country’s future inside the currency union:
Talks between Greece and eurozone finance ministers broke down on Monday with an ultimatum that Athens by Friday should ask for an extension of the current bailout programme which runs out next week. Greek finance minister Yanis Varoufakis said he would have been willing to sign off on a proposal made by the EU commission, which was more accommodating to Greek demands, but that the Eurogroup offer – to extend the bailout programme by six months – was unacceptable. The battle is about more than just semantics. EU officials say Greece cannot cherrypick only the money-part of a bailout and ignore the structural measures that have to be implemented to get the cash. “If they ask for an extension, the question is, do they really mean it. If it’s a loans extension only, with no commitments on reforms, there is an over 50 percent chance the Eurogroup will say no,” one EU official said. Failure to agree by Friday would leave very little time for national parliaments in four countries – notably Germany – to approve the bailout extension. It would mean Greece would run out of money and be pushed towards a euro-exit. … As for the prospect of letting Greece face bankruptcy to really understand what’s at stake, an EU official said “there is no willingness, but there is readiness to do it”.
The mere fact that there is now official talk about a possible Greek exit from the euro is a clear sign of how serious the situation is. It is also an indication that the EU, the ECB and the governments of the big EU member states have a contingency plan in place, should Greece leave the euro.
My bet is that Tsipras is gambling: he wants out of the euro, but with a majority of Greeks against a reintroduction of the drachma he cannot go at it straightforwardly. He has to create a situation where his country is given “no choice” but to leave. This is why he is negotiating with the EU in a way that he knows is antithetical to a productive solution.
The reason why Tsipras wants out is simple: he is a Chavista socialist and wants to follow in the footsteps of now-defunct Venezuelan president Hugo Chavez. That means socialism in one country. (A slight rephrasing of the somewhat tarnished term “national socialism”.) In order to create a Venezuelan-style island of reckless socialism in Europe, Tsipras needs to get out of the euro zone.
Should he succeed, it is likely that other countries will follow his example, though for different ideological reasons. However, there is more at stake in the Greek crisis than just the future of the euro zone. Tsipras is riding a new wave of radical socialism, a wave that began moving through Europe at the very depth of the Great Recession. Statist austerity was falsely perceived as an attempt by “big capitalism” to dismantle the welfare state. It was not – quite the contrary: statist austerity was a way for friends of big government to preserve as much as possible of the welfare state.
However, socialists have never allowed facts to get in the way of their agenda. And they certainly won’t let facts and good analysis get in the way of their rising momentum. What started mildly with a socialist victory in the French elections in 2012 has now borne Tsipras to power in Greece and is carrying complete political newcomers into the center stage of Spanish politics. But this new and very troublesome wave of socialism is not stopping at member-state capitals. It is reaching into the hallways of EU politics as well. As an example, consider these words on the Euractiv opinion page by Maria João Rodrigues MEP, Vice-Chair of the Socialists and Democrats Group in the European Parliament, and spokesperson on economic and social policies:
The Greek people have told us in January’s elections that they no longer accept their fate as it has been decided by the European Union. For those who know the state of economic and social devastation Greece has reached, this is only a confirmation of a survival instinct common to any people. The Greek issue has become a European issue, and we are all feeling its effects.
This is a frontal attack on EU-imposed austerity, but it is also a thinly veiled threat: unless Europe moves left, the left will move Europe.
Back to Rodrigues:
European integration can only have a future if European decisions are accepted as legitimated by the various peoples who constitute Europe. Decisions at European level require compromises, as they have their origins in a wide variety of interests. But these compromises must be perceived as mutual and globally advantageous for all Member States involved, despite the commitments and efforts they entail. The key question now is whether it will be possible to forge a new compromise, enabling not only to give hope to the Greek people, but also to improve certain rules of today’s European Union and its Economic and Monetary Union.
This should not be misinterpreted as a call for return of power to the member states. The reason why is revealed next:
We need a European Union capable of taking more democratic decisions and an Economic and Monetary Union which generates economic, social and political convergence, not ever-widening divergence. If Europe is unable to forge this compromise, and if the rope between lenders and borrowers stretches further, the risks are multiple: financial pressures for Greece to leave the euro; economic and social risks of continued stagnation or recession, high unemployment and poverty in many other countries; and, above all, political risks, namely further strengthening of anti-European or Eurosceptic parties in their aspiration to lead national governments, worsening Europe’s fragmentation.
The fine print in this seemingly generic message is: more entitlement spending to reduce income differences – called “economic and social convergence” in modern Eurocratic lingo – and a central bank the policies of which are tuned to be a support function for fiscal expansion. The hint of this is in the words “If the rope between lenders and borrowers stretches further”: member states should be allowed to spend on entitlements to reduce income differences, and if this means deficit-spending, the ECB should step in and monetize the deficits.
Rodrigues offers yet another example of the same argument:
[Many of] Greece’s problems were aggravated by the behaviour of the European Union: Firstly, it let Greece exposed to speculative market pressures in 2010, which exacerbated its debt burden. Secondly, when the EU finally managed to build the necessary financial stabilisation mechanisms, it imposed on Greece a programme focused on the reduction of the budget deficit in such an abrupt way that the country was pushed into an economic and social disaster. Moreover, the austerity measures resulted in a further increase of Greece’s debt compared to its GDP.
It is apparently easy for the left to look away from such obvious facts as the long Greek tradition of welfare-state spending. But that goes with the leftist territory, so it should not surprise anyone. More important is the fact that we once again have an example of how socialists use failed statist austerity to advocate for even more of what originally caused the crisis, namely the big entitlement state. They want to turn the EU and the ECB into instruments for deficit-spending ad infinitum to expand the welfare state at their discretion.
To further drive home the point that what matters is the welfare state, Rodrigues moves on to her analysis of Greece:
What Greece needs now is a joint plan for reform and reconstruction, agreed with the European institutions. This plan should replace the Troika programme, while incorporating some of its useful elements. Crucially, it should foresee a relatively low primary surplus and eased conditions of financial assistance from other eurozone countries, in order to provide at least some fiscal room for manoeuvre for the country. In return, the plan should set out strategic reforms to improve the functioning of the Greek economy and the public sector, including tax collection, education, employment and SMEs services as well as ensuring a sustainable and universal social protection system.
There is no such thing as a “sustainable and universal social protection system”. When Europe’s new generation of socialist leaders get their hands on the right policy instruments they will turn all government-spending faucets wide open. Deficits will be monetized and imbalances toward the rest of the world handled by artificial exchange-rate measures (most likely of the kind used by now-defunct Hugo Chavez).
If this new wave of socialism will define Europe’s future, then the continent is in very serious trouble.
A short-term measure of the strength of the momentum will come later this week when we will know whether or not Greece will remain in the currency union. Beyond that, things are too uncertain to predict at this moment.
After a delay with its national accounts publications, Eurostat has now caught up. Fourth-quarter numbers are beginning to sip out, with the following press release last Friday:
Seasonally adjusted GDP rose by 0.3% in the euro area (EA18) and by 0.4% in the EU28 during the fourth quarter of 2014, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the third quarter of 2014, GDP grew by 0.2% in the euro area and by 0.3% in the EU28.
More important, though, is the annual growth rate:
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 0.9% in the euro area and by 1.3% in the EU28 in the fourth quarter of 2014, after +0.8% and +1.3% respectively in the previous quarter. During the fourth quarter of 2014, GDP in the United States increased by … 2.5% (after +2.7% in the previous quarter).
The U.S. economy is still way ahead of Europe, and there are no signs of this parity shrinking. For the three countries where Eurostat has reported individual 2014 GDP numbers, inflation-adjusted growth rates are far from impressive:
For the two largest economies in the euro zone, Germany and France, the combined growth rate is 1.08 percent. That is a minuscule uptick over the second and third quarter annual growth rates of 0.99 and 1.02 percent, respectively. Furthermore, while the combined growth rate for Germany and France is slowly increasing, the individual growth rates for the two countries are going in different directions. Again, annual inflation-adjusted growth rates reported by quarter:
Frustrating comments are already pouring out over the internet. EUbusiness.co. says that the numbers are “too weak to convincingly signal a full-blown recovery”. They are absolutely right. Analysts quoted by EUbusiness.com attribute the slight uptick in growth to falling oil prices and a weaker euro. Both of these are external factors, which means that Europe still has no core growth power. It is also important to remember that the weak euro partly is attributable to concerns about the future of the currency. With Greece basically in open defiance of payment obligations and EU-imposed austerity programs, and with countries like Portugal and Italy likely to join Greece should Athens decide to secede from the currency union, there are complicated, long-term reasons for a weak euro.
One analyst suggests to EUbusiness.com that the fact that the ECB has basically eliminated interest rates is adding so much to the picture that it is time to talk about a European recovery:
The ECB’s version of so-called quantitative easing has already decreased government borrowing prices across most of the currency bloc and weakened the euro, which should help to boost exports in Europe. “For the first time in two years, we can say that the region is going for solid growth,” Anna Maria Grimaldi, an economist at Intesa Sanpaolo SpA in Milan, told Bloomberg News. “The euro area is supported by the very strong tailwinds of the fall of the euro, the fall of oil prices and the fall of interest rates sparked by ECB QE.”
However, as I explained last week, the zeroing of interest rates has at best led to a temporary boost in business investments. There are no signs of a permanent recovery.
I will repeat this ad nauseam: unlike the American economy, the European economy has no reason to recover.
There has been another terror attack in Europe against freedom of speech. To the day a month after the Charlie Hebdo tragedy, two terrorists opened fire at a freedom-of-speech event in Copenhagen, Denmark. The event, held at a cafe the name of which translates to “The Powder Keg”, was organized to commemorate the 25th anniversary of the Iranian government’s “fatwa” death sentence against the author Salman Rushdie. Among the participants were a Swedish artist, Mr. Lars Vilks, who has become well known in freedom-of-speech circles for his drawings of the muslim prophet Muhammed as a dog. Another participant was the French ambassador, who was actually speaking at the time of the attack.
Danish police had anticipated an elevated threat level and several police officers were at the scene already when the event started. This probably prevented a bigger disaster than what unfolded: one man died and three police officers were wounded.
This is yet another attack on one of the cornerstones of a free society and Western civilization. As was the case with the attack on Charlie Hebdo, this one took place in a country where the roots of liberty are deep. The Danish government reacted very strongly to the attack, with Prime Minister Helle Thorning scolding the terrorists and promising that this will only embolden the Danish people’s support for freedom of speech.
While, technically, we do not yet know who the perpetrators are, it is not far fetched to assume that they share the same loathsome fundamentalist views as the Charlie Hebdo attackers. The Danish government and the PET, the Danish equivalent of the FBI, characterize this as a terror attack and act accordingly. Regardless of whether the terrorists wanted to attack the event because of the “fatwa” anniversary, or because Mr. Vilks or the French ambassador were there, this is yet another reminder of the fact that there are ideologues who actually hate free society and who are willing to die and kill for their hatred.
And beyond the tragedy of yet more casualties at the hands of fundamentalist terrorists, let us once again remind ourselves and each other never to take freedom for granted. Let us once again remember those who have sacrificed their lives so that the rest of us can live under the banner of liberty. Now that free society is under active attack, we must once again remind ourselves of the epic words of President Reagan:
Freedom is never more than one generation away from extinction.
But we must do more. We must fill those words with action. We must all contribute toward the defense of liberty against its fanatic enemies. That defense includes all the cornerstones of a free society: the freedom of speech; accountable government; and economic freedom.
Or, to paraphrase the classic French cry of freedom: Laissez-nous parler; laissez-nous gouverner; laissez-nous faire.
Sweden has joined the club of runaway monetary policy. From Reuters:
Sweden shocked markets on Thursday by introducing negative interest rates, launching bond purchases and saying it could take further steps to battle falling prices. The central bank joins a list of those including the European Central Bank, the U.S. Federal Reserve and the Bank of England, to resort to unconventional monetary policy steps to confront an unusual combination of economic problems.
No. The Federal Reserve has reversed course. And together with The Bank of England the Fed has been helped by the fact that it is operating in an economy with moderate taxes and relatively relaxed fiscal policy. The ECB has opened the monetary flood gates in an economy that is plagued by statist austerity and more or less zero growth.
In fact, the slight uptick in economic activity in the third quarter of 2014 that I reported on earlier this week is closely correlated to the all-out liquidity bombardment that the ECB began early summer last year. On the margin there are those who will take advantage of declining interest rates. According to data from the ECB, euro-denominated loans to non-financial corporations declined noticeably in 2014. In the group of loans with a 5-10 year rate fixation, the interest on loans above 1 million euros fell by more than one percentage point, from 2.9 percent to 1.73 percent. Other collateral loan categories saw smaller declines, but the downward trend is unmistakable.
It is likely that the same thing will happen in Sweden; the question is what effect lower interest rates will have on economic activity. In the EU, gross fixed capital formation – a.k.a., business investments – did actually increase in 2014. However, broken down by quarter, the annual growth rate (i.e., over the same quarter the previous year) looks much different:
In other words, the largest annual increase was recorded before the ECB declared a negative interest rate. It remains to be seen what happened in the fourth quarter, but even if there was an increase somewhere in the same territory as earlier in 2014, the big question is what the lasting impact is going to be on GDP growth and employment. One indicator of this is private consumption, which seems to have benefited a bit more from the ECB’s desperate interest rate cuts. Again measured as annual increases by quarter:
For the two years Q3 2012 to Q3 2014 the annual increase was, on average, 0.3 percent. Nothing to be jubilant about, but the modestly accelerating trend during 2014 indicates a stabilization (rather than some sort of genuine recovery).
What does this mean for Sweden? The problem with that particular country is that its private-consumption increase is inflated by recklessly high household debt levels. These levels, in turn, are held up by mortgage loans with absolutely irresponsible terms, such as interest-only payments or basically life-long maturity periods. As I explained in my book Industrial Poverty, if Swedish household debt had remained a constant share of disposable income from 2000 and on, its private-consumption growth rate would almost have stalled.
Put bluntly: Sweden appears to be in reasonable economic shape only because households have increased their debt as share of disposable income from 90 percent 15 years ago to 180 percent today.
What this means is, plain and simple, that it is exceptionally irresponsible to make more credit available at even lower costs. But it also means that on the margin, the Swedish Riksbank will get less new economic activity out of every negative interest point than the ECB gets; the higher the household debt, the less inclined banks are to let people pile on new debt.
Unfortunately, the Riksbank president, Mr. Stefan Ingves, does not see this problem. Reuters again:
“Should this not be enough, we want to be very clear that we are ready to do more,” said Central bank governor Stefan Ingves. “If more is needed, we are ready to make monetary policy even more expansionary.” The central bank said this would mean further repo-rate cuts, pushing out future rate hikes and increasing the purchases of government bonds or loans to companies via banks.
As the Reuters story also explains, the Riksbank is ready to move into debt monetization – unthinkable only a year ago:
The Riksbank said it would “soon” make purchases of nominal government bonds with maturities from 1 year up to around 5 years for a sum of 10 billion Swedish crowns ($1.17 billion). But with the ECB printing 60 billion euros a month in new money the Riksbank’s much more limited program may have little effect on bond yields – already at record lows. “In terms of GDP, the mini-QE program amounts to about 0.25 percent,” banking group Morgan Stanley said in a note. “Therefore, this measure should be seen more as a signal that the Riksbank is ready to do more and remain dovish for the foreseeable time.”
In other words, here again the marginal payoff is going to be small. The only exception would be if the Swedish government decides to throw out its balanced-budget rules and start a major spending drive funded by the Riksbank. This seems unthinkable today – just like negative interest rates and a QE program seemed unthinkable a year ago.
Quantitative Easing is not a recession remedy. It is a defensive monetary strategy. So is the negative interest rate. Together, these two measures declare that a government and its central bank has reached the end of the road in trying to get their economy moving again. The big problem for Europe, Sweden included, is that they have come to this point almost seven years after the Great Recession started. With a recovery being half-a-decade overdue, with tapped-out monetary policy and fiscal policies restrained by ill-designed balanced-budget measures, Europe is firmly planted on the road straight into industrial poverty.
Sweden, with its imbalanced real estate market and very deeply indebted households, is on the same road, only with a more volatile ride.
With third-quarter GDP data available we can now get an updated view of the government debt situation across the economically stagnant European Union.
For the first time in years there is actually a little bit of good news on the horizon. But before we get there, let us look at member-state debt ratios as of third quarter last year:
|Third quarter 2014|
Debt ratios appear to be plateauing. From the third quarter of 2012 to Q3 2013, seven member states decreased their debt ratios; from Q3 2013 to Q3 2014 eight countries experienced a decline. The following table reports changes in percentage points; for example, in Austria the debt ratio increased from 82.4 percent in Q3 2012 to 84.1 percent in Q3 2013 – a difference of 1.7 percent:
|Debt ratio changes, third quarters|
|12 to 13||13 to 14|
For the EU-28 as a whole the debt ratio has increased from 83.4 percent in 2012 to 86.6 percent in 2014. Euro-18 has seen a similar upward trend.
However, if we review the data on a quarter-to-quarter basis, things look a bit more optimistic. For the EU-28 there is a small decrease, from 87 percent in Q2 2014 to 86.6 percent in Q3 2014. The same marginal decline is visible in 18 member states. In eleven of them the decline is only marginal, i.e., less than one percentage point, an fact that is important to keep in mind.
That said, it would make sense that the debt ratio is stabilizing across Europe. The statist austerity measures applied in several countries the past 2-4 years have cut spending and increased taxes – not to reduce the size of government, but to make the welfare state more affordable in a new era of economic stagnation. Those measures have now re-aligned the welfare state with a smaller, non-growing GDP.
Greece appears to have achieved this alignment. Their debt ratio fell, quarter to quarter, for the first time since before the Great Recession:
It is far too early to actually conclude that the debt ratios have stabilized. However, this first indication, embedded in third-quarter data, is encouraging in the sense that the crisis is over and an era of less-worse stagnation has begun.
What these numbers do not show, though, is any sign of a turnaround in the European economy. Less inflation, GDP growth remains in one-percent territory, which is actually worse than in 2011.
Lacking the economic and political willpower to recover, Europe has opted for the second-best alternative: economic stagnation and industrial poverty.