12/09/11 Baltimore, Maryland – Dow up 198 points yesterday. Why? People think the Europeans are going to sort out their problems. But are they?
Europe is the world’s biggest economy. It is menaced by bank and government debt defaults. It is growing old and has far more social spending obligations than it can afford. It is paralyzed by competing national governments and decentralized financial institutions. It can say ‘drop dead’ in 17 different languages.
And if Europe goes into a deep or prolonged economic slump, the rest of the world follows. Because Europe is a big customer, not only for Asia, but for America too.
The only way out of the debt problem for Europe is growth. Austerity alone won’t do it. Europe’s debts can only be serviced if the economy grows. Not that we’re counting on it. On the contrary, we’re guessing it won’t happen.
Europe’s social spending can only continue if there is growth. Without growth, everything goes bad. Debts can’t be paid. Public workers can’t be paid. And neither the stock market or the bond market are worth nearly as much as people think they are.
Everybody assumed growth would continue — even if it were interrupted from time to time by recession. Every recession since the ’40s has been a relatively quick and relatively painless pause, not a major change of direction.
But now, something seems to have changed. Maybe it is a Great Recession, as some call it. Maybe it is a Great Correction, as we call it. And maybe the age of growth is over.
What a helluva thing that would be if it were true. When people lent money to government and private borrowers they were betting on growth. When the government extended its promises of pensions and health care, it was counting on growth. Take away the growth and the credits and promises turn bad. And if they’re bad, the whole capital and government structure is in danger. Without growth almost all the world’s major banks will go broke. Without growth, every government in the developed world will default (or worse). Without growth, the world we have known falls apart.
But why would growth stop?
We don’t know. But it stopped in Japan. Today’s output in Japan is actually lower than it was in 1991. What happened? Banks were over-indebted. Corporations were over-extended. Real estate and housing were over-bought.
The Japanese government has been able to hold things together…but only by over-doing it itself. Now, it has such heavy debt that the home islands may sink under the weight of it. Stocks and property have lost about 2/3rds their value. There are no more jobs than there were 20 years ago…
And still no sign of growth.
Could Europe go the same way? Yes, it could.
How about America? Ditto.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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BUT BUT BUT
Japan, Bill says, has had no growth since 1991. Yet “the market” seems to think it will have no trouble at all paying its debts. In fact 10-year Government of Japan Bonds yield just 1.02%, about half of what the United States the U.K must pay.
Bill, the market has not heard your message. The market thinks lack of growth is not a problem for Japan. In fact Japanese debt has no problems at all according to the market.
We shall see…
Defaults on debt will not destroy the real wealth of the world.
It just redistributes the real wealth from lender to borrower.
Grab a seat it will be entertaining to most citizens who mostly are not lenders or investors but rather are in debt.
Japan is still borrowing from its aging population internally, who are rah-rah-rah Japan. That will change soon as the old get older, and they will face higher interest rates from the open market on all that debt.
If the growth should stall, it will be because of two things: credit contracting and cheap energy no longer available.
I consider both of these to be now true, and we are likely at the end of growth worldwide, like several writers have already proposed.
Memo to BB. The USA stopped growing around 2003. The housing bubble covered it up for a while. But now it is obvious.
Europe will not see any real growth this decade.
Spanish and Italian firms are cleaning out their bank accounts and depositing the money in German banks. That will really help the reserve ratios of their local banks!
Greeks who still have cash are buying gold.
Britain has decided to leave the party early.
If the European people feel it is time to abandon ship why would anyone have any confidence in the Euro?
Everyone thought the Euros could get along with each other and they did for awhile. War weariness kept things in line for a time, but that time has passed. This new generation of Euros are too far removed from the memories of war. They are getting ready to fight one another again. “you gotta keep ‘em separated”.
Natural growth and economic growth pretend to be married to each other. Much to the detriment of the kids.
“But why would growth stop?”
Cos we live in a planet with finite resources? And it coincides with infinite money growth!!
The economy cannot grow under such huge debt obligations and the debt obligations cannot be paid because the economy is unable to grow. Best solution to all of this – if your politicians got your country into such unbearable debt that it seems like it can never be eliminated – eliminate the bankers themselves !
All economic theories appear to be upside down including the definition of capitalism that the west fought the east to a “defeat”. A system designed to compel the prudent to bail out the reckless “too big to fail” is doomed for sure. A system designed to create money out of thin air via printing will fail.
Loans are ok but when given to a guy who has no repayment potentials is like pouring water on a drowning man. If Greece will fail, let Greece fail. That is capitalism. Greece will learn the lessons from failure and bounce back wiser albeit with bruises as a reminder of past folly. The European welfare state is unaffordable. If they insist that they will continue down the path of living beyond it’s income then that is a certain one way ticket to trouble. By no means am I preaching that the less priviledged should not be helped but the reckless bankers must not be rewarded.