More Stimulus for the Debt Junkies

And the latest installment…

The Dow dropped 228 points yesterday. Everybody blamed a different part of the world. Some blamed a developing civil war in Libya. Some blamed China’s big trade deficit (China imports beaucoup energy and raw materials). And some blamed rising interest rates in Europe.

“Borrowing costs soar on Eurozone periphery,” says a headline in The Financial Times.

Remember, Japan, Europe and America all depend on low interest rates. They’re all addicted to cheap money. Take away the stimulants and their economies slump.

Ten year yields on Greek debt rose to over 12%. The Portuguese government paid 6% for its latest 2-year funding. A Portuguese debt trader:

“We are not at bailout levels yet, but we are moving in that direction.”

Why not just let rates rise to market levels…and force everyone to kick the debt habit?

No…no…no… You don’t understand, dear reader. Since a slump is just the thing the financial stimulants were designed to avoid, governments are very reluctant to give them up. Instead, they bailout, prop up, and tide over every bank and sovereign debtor who threatens to go into rehab.

But as we’ve seen on the mean streets of Baltimore, it takes bigger and bigger doses to keep the junkies happy. You cover one bad debt by adding another. And then you have two bad debts to worry about. In Europe, Japan and America, bad debt held by the banks has effectively taken over the public sector. Now, government debt is going bad too.

Meanwhile, on the streets of Japan, we see what the government’s 2-decade-long methadone finance program has wrought.

Bloomberg reports:

Japan’s economy contracted more than the government initially estimated in the fourth quarter because of a downward revision to capital investment and consumer spending.

Gross domestic product shrank at an annualized 1.3 percent rate in the three months ended Dec. 31, more than the 1.1 percent contraction reported last month, the Cabinet Office said today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 1.2 percent contraction.

Private consumption fell 0.8 percent drove GDP lower in the fourth quarter after the government ended a subsidy program to buy fuel-efficient cars in September and reduced incentives to purchase electronic home appliances in December, a program that will end in March. Capital spending rose 0.5 percent, compared with the initial estimate of a 0.9 percent increase.

Take away the juice; the juice junkies slow down.

Back in the US, the Republicans proposed to take away a little bit of the deficit. The Democrats proposed to take away less. The Senate rejected both proposals.

The Fed has no intention of taking away anything. There is some talk of “exiting” the zero interest rate/QE programs. But it is an empty bluff, in our opinion. They won’t give up their fix until they have to.

The economy is too weak. Households are too fragile. And the recovery is a sham.

In the news yesterday was a discussion of how much the hike in oil prices will cost the typical family. Gasoline prices have gained about 30% in the last year. April crude traded yesterday at over $100, for the first time in 2 years. This will cost the typical family about $700 per year. That money will have to come from somewhere. Taking it away is sure to cause pain somewhere else. Bloomberg continues:

Nouriel Roubini, the New York University economist who became known for his pessimistic forecasts before the financial crisis, told reporters in Dubai on Tuesday that an increase in oil prices to $140 a barrel could even cause some advanced economies to dip back into recession.

The rising price of gas – which averaged $3.57 a gallon nationwide on Monday, according to the government – is already prompting some people to change their habits.

Bill Bonner
for The Daily Reckoning