A
general optimism prevails in the United States and Europe that the
economies have finally turned the corner and growth is resuming. In
the U.S., automobile sales are up and the housing industry has been
improving, but there are many negatives which show overall optimism
is unwarranted. In Europe, too, there have been modest
improvements—some negative growth factors have become less
negative—and there is a general feeling that the bailouts of Greece
and other countries are working well. Below we explain some less
favorable facts about the U.S. and Europe which cannot be ignored.
They pose continuing problems.
United
States
The rate of economic growth declined
over the past year to 1.6% from 2.8%. The employment figures
released on September 6 showed August added 169,000 jobs, not enough
to keep up with the growth in population. Moreover, the figures for
June and July were revised downward by 74,000 jobs. June figures
were also revised downward a month ago as were those for May. At the
recent rate of hiring, employment won't get back to pre-recession
levels for more than eight years. Of the new jobs created in August,
a disproportionate number were low-paying ones in retail sales and
restaurants.
Unemployment declined in August from
7.4% to 7.3%, but this was mostly due to the increase in the number
of people who had stopped looking for work because they don't believe
they can find a job. If they were counted as unemployed, the
unemployment rate would be near 10%. There were also 7.9 million
Americans who wanted full-time work but could only obtain part-time
work. If these were included with those who have stopped looking for
work, the rate would be 13.7%.
August was the 40th
consecutive month in which more unemployed workers left the labor
market than found jobs. Should we be asking “Is the economy going
up or down?” In August the number of people reporting they had
jobs—a separate survey from the payroll calculations of
employment—fell by 115,000. Four years after the official end of
the recession, in 2009, there are still 1.9 million fewer jobs than
at the peak in 2008. And even though price inflation is now very
low, workers' pay still isn't keeping up with it. According to Labor
Department data, the average hourly pay for a non-government,
non-supervisory worker, adjusted for price increases, declined to
$8.77 from $8.85 at the end of the recession in 2009.
The labor participation rate includes
those working plus those looking for work. In August this
measurement was the lowest since 1978. This number has continued to
decline throughout the so-called recovery from the recession. This
recovery has been the slowest and longest from any recession in our
history—in spite of the $831 billion stimulus program which was
supposed to create economic growth.
One must question whether that stimulus
program aided growth or retarded it. According to the Congressional
Budget Office, every job created by the stimulus program cost the
taxpayers between $500,000 and $4 million. Not only was the stimulus
program ineffective, it added to the national debt, which retards
future economic growth.
Europe
The euro-zone economy in the second
quarter grew at a rate of 0.3%, compared to the previous quarter,
ending six consecutive quarters of contraction. That is far too
sluggish to overcome still-rising debts and massive unemployment,
which is still over 12%. Charles Wyplosz, economics professor at the
Graduate Institute, Geneva, says, “If we had 3 or 4 years of growth
at 2% to 3% annually then we would probably get out of the
woods...But I don't know where such growth would be coming from.”
The euro-zone economy is still 3%
smaller than in early 2008 when the economic crisis hit. In many
countries far more businesses are failing than are being founded, and
there is more firing than hiring. And countries who received bailouts are
not doing as well as anticipated and may require further aid, adding
to their debts, as we explain below.
Greece
In
August, Greece reported budget data showing a surplus compared to
last year's steep budget deficit. But the economy contracted by 4.6%
in the second quarter, and unemployment was still over 27%. The
country's GPD has declined for 20 straight quarters as the nation's
recession drags on for six years.
German
Finance Minister Wolfgang Schauble said Greece will need a third
bailout in order to avert bankruptcy. Der
Spiegel reported the German central
bank expects new outside financial aid will be necessary for Greece
by the beginning of 2014 at the latest.
Greece's
debt-to-GDP ratio is expected to reach 176% this year, far above the
120% the International Monetary Fund accepted as “sustainable.”
But even the 120% level is double that of the European Union's
monetary pact, which states member nations must limit their
debt-to-GDP ratios to 60%.
The
120% level is highly suspect. As we pointed out in our book The
Impending Monetary Revolution, the Dollar and Gold
an IMF report in December 2011 said that a small shock to this
“accident prone” program could send “debt on an ever increasing
trajectory.” A lower growth rate, smaller privatization receipts,
higher interest rates than assumed, or a worse budget performance
could leave Greece's debt-to-GDP at 159% in 2020, said the IMF. A
report in 2011 by three economist at the Bank for International
Settlements concluded that the threshold for sustainable debt was a
debt-to-GDP ratio of 85%—not 120%—based on studies of 18
countries from 1980 to 2010. Remember, too, that it was the
revelation that the Greek ratio had gone to 113.4% in 2009 that
triggered the Greek crisis.
The
IMF engaged in “arithmetical gymnastics” to arrive at a
debt-to-GDP for Greece of 120% for 2020. The
Wall Street Journal
has noted that it is only because the IMF “accepted these mostly
fictional debt outlooks” that it and the other contributors to the
Greek bailout now stand to lose money. The IMF even tossed out its
own rule against lending to countries whose debt isn't “sustainable
in the medium term.”
The
IMF worries that without another bailout, Greece will be unable to
repay what it owes the IMF from the previous bailout. The IMF now
says Greece's longer-term debt targets cannot be met without
forgiveness of some of the nation's debts. It insists it will not
forgive any repayment of its loans to Greece but is pushing for the
European countries who were partners in the bailout to do so—so
that Greece will have enough money to repay the IMF's portion of the
bailout! You can imagine how that has gone over with those
countries! Germany, Finland, Austria and others have stated the IMF
should take its share of any losses along with the euro-zone
governments.
After declaring the need for
additional debt relief for Greece, the recent IMF report noted:
“Risks remain to the downside, mainly from lower growth and
potential fiscal and privatization slippages.” It emphasizes that
the Greek government has failed in almost every instance to hold up
its end of the bailout bargain. For example, privatization of state
assets is now expected to yield €22 billion through 2020, less than
half what was predicted in March 2012.
Greece's debt and growth problems
are too big to ignore for long, notes Gabriel Sterne, senior
economist at Exotix investment banks. “These are a couple of cans
that are perhaps too heavy to kick down the road.”
France
While Greece and
other troubled countries have undertaken austerity measures that cut
spending and reduce social benefits in order to salvage their
economies, France's socialist President Hollande has done just the
opposite. He increased the government budget deficit, raised the
minimum wage, and lowered the minimum retirement age from 62 to 60,
reversing the raise by former president Nicolas Sarkozy.
Hollande's
government increased taxes by over €7
billion euros ($9.3 billion) and added €20
billion to the budget while cutting spending by only half that
amount. Next year's budget proposes €6 billion in new taxes.
Business investment has fallen every month since Hollande took
office 15 months ago. A Markit Purchasing
Managers Index over 50 shows economic growth, below 50 shows
contraction. France's PMI dropped further, to 47.9 from 49.1.
French unemployment, now above 10%, has increased for the 23rd
month in a row. France's debt-to-GDP ratio, which was 31% in 1980,
57% in 1994 is now over 90%, the highest of any European country not
receiving a bailout.
The IMF in August
urged Hollande to scrap the new taxes, saying France's failure to
grow the economy will have “significant outward spillovers” into
other euro-zone economies.
Spain
Spain's
GDP declined 0.1% in the second quarter. Though modest, this was the
eighth consecutive quarterly contraction.
Spain's
unemployment rate fell for the first time in two years. But the drop
of almost a percentage point still leaves the rate above 26%—well
over twice the euro-zone average. Furthermore, the decline doesn't
really indicate an upturn in the economy because more people stopped
looking for work than found jobs. Almost all the jobs created came
from coastal areas where summer vacation jobs are concentrated. Jobs
continued to be lost in sectors like manufacturing and construction.
Spain's
debt-to-GDP ratio—which was only 36% in 2007 and Spain had a
triple-A credit rating—is expected to be over 100% by 2015,
according to the IMF.
Italy
Italy's
debt-to-GDP ratio is on course to be over 130% for 2013. The nation
would need an annual average economic growth of around 3% over the
next 20 years just to reduce its debt-to-GDP ratio to 90%. How can
this be done in a nation that since 1999 has averaged only 0.5%
growth annually?
The
number of Italians living below the poverty level has increased by
14% in the last two years.
Portugal
Portugal
would have to increase its average economic growth to as much as
6%—nine times its average since 1999—in order to cut its debt
ratio to 90%.
Portugal
needs €14 billion in 2013 and €15 billion in 2014 to repay
creditors, according to the “troika” managing the bailout (the
European Central Bank, the European Commission and the IMF).
Portugal will need a second bailout on top of the original €78
billion of the first bailout.
Cyprus
Cyprus
is widely expected to need more money. It's economy is in a free
fall despite its €10 billion bailout. Analysts say the bailout
forecast of an economic contraction of 8.7% this year is far too
optimistic. Unemployment is already at 17.3%, well above the bailout
forecast of 15.5%. While people are allowed to make limited cash
withdrawals, 90% of the deposits at the nation's largest bank are
frozen during restructuring. Capital controls isolate the country
from the rest of the euro zone. Most small businesses are operating
on a cash-only basis.
Why National
Deficits Matter
Nobody
can ever get out of debt by borrowing successively larger sums to
cover successively larger debts. Neither can governments.
Eventually debts are repaid or the borrower goes bankrupt. In the
U.S. the Federal Reserve prints money enabling the federal government
to spend it today by borrowing from our children and grandchildren.
They will be obligated to pay it, but they will never be able to do
so. The federal gross national debt is now approaching $17 trillion.
(It is projected to be $17.2 trillion by the end of 2013.) At $17
trillion, the U.S. debt-to-GDP ratio is 106%. According to the IMF,
meeting America's obligations will require an immediate and permanent
35% increase in all taxes and a 35% cut in all government benefits.
That's not going to happen. It can't happen. Instead America will be
bankrupt. By 2025, entitlement spending and debt payments are
projected to consume all federal revenue. And having the Fed print
vastly more money to pay our obligations will not solve the problem;
it will merely bring inflation that destroys the value of the dollar.
What
about more stimulus spending? Politicians will certainly clamor for
this as a solution, but it won't work. Obama's colossal $831 billion
stimulus bill didn't work; it made the problem worse by further
ballooning the national debt. More and larger stimulus programs
would do the same. Economist John Maynard Keynes claimed spending—for
anything—was the driver of the economy and that government spending
produced a multiplier effect as dollars were, in turn, spent over and
over throughout the economy. But Hunter Lewis, Keynes biographer,
says, “There is no evidence” that spending ever cured a
recession, and Keynes “wasn't particularly interested in evidence.”
Harvard
Professor Robert Barro, who has done extensive research on Keynesian
multipliers, has written, “What few know is that there is no
meaningful theoretical or empirical support for the Keynesian
position.” Obama's stimulus bill was based on a Keynesian
multiplier of 1.5, meaning the GDP will increase by $1.5 for every
dollar of additional government spending. This multiplier was stated
by administration officials trying to sell the stimulus bill to
Congress and the public, and it is stated specifically in the First
Quarterly Report by the Council of Economic Advisors on the subject;
but there is no evidence that multiplier is valid. Among other
research on this subject, my book cites the work of Barro and
Redlick, who found a multiplier effect of 0.4 to 0.7, and of
Professor Gerald Scully, who found a multiplier of 0.46 in his
analysis of 60 years of federal outlays. If the multiplier really
were larger than 1.0, the GDP would rise even more than the rise in
government spending! The U.S., Greece and other spendthrift
countries wouldn't be going broke, they'd be getting richer the more
they spent! The reality is that the multiplier is always less than
1.0. The money that is spent over and over again in the private
sector from government programs always adds less to the GDP than the
cost of the programs. If that money were not preempted by government
stimulus spending, it would be spent (or saved/invested) multiple
times in the private sector, too—and more effectively.
Hunter
Lewis says, “Keynes completely ignores the
issue of how you are investing. For him, not only is any investment
equivalent to any other investment, but spending is equivalent to
investment.” You can see why this is appealing to Barrack Obama as
it was to Franklin Roosevelt, who popularized Keynes' ideas.
The great economist Ludwig von Mises wrote way back in 1944, in his book Omnipotent Government,
“All
governments are firmly resolved not to relinquish inflation and
credit expansion. They have all sold their souls to the devil of easy
money. It is a great comfort to every administration to be able
to make its citizens happy by spending. For public opinion will then
attribute the resulting boom to its current rulers. The inevitable
slump will occur later and burden their successors....Lord Keynes,
the champion of this policy, says: 'In the long run we are all dead.'
But unfortunately nearly all of us outlive the short run. We are
destined to spend decades paying for the easy money orgy of a few
years.”
All
the world's central banks now operate on Keynesian principles. The
Fed, the European Central Bank, and the central banks of Japan,
Switzerland and China have printed an astounding $10 trillion since
2007, tripling the size of their combined balance sheets.
Gold
With
uncertainty plaguing national economies and the future value of their
money, people are continuing to turn to gold as a way for
safeguarding their future. Two important trends in this are evident
in the second quarter. The first, which is a continuation of a trend
evident for some time, is a desire for the buyers of gold to take
physical possession of it. This means a preference for physical
possession of jewelry, coins and bars rather than holding gold ETFs,
shares in gold mining companies, or coins or bars held in financial
accounts. The second is the way increased private buying has more
than made up for a decline in central bank buying.
After
the sharp decline in April, gold prices seem to have bottomed. On
balance, the second quarter showed very positive signs. Jewelry
showed a multi-year high as lower prices generated a surge of demand
from consumers, particularly in China and India. In China, demand
hit a record 385.5 metric tons in the second quarter. That was
double the figure from a year earlier and well above the 294.3 metric
tons of the first quarter, which occurred before the big price drop
in April. Overall, world gold jewelry demand increased 37% and reached
575.5t, the highest volume in five years and in value terms 20%
higher than the second quarter 2012.
Gold
demand in India in the second quarter was up 70% year on year to
310t despite continued government efforts to curb enthusiasm for the
metal. Jewelry was up 52% to 188t, and retail bar and coin sales
set a record at 122t, up 116%.
Worldwide,
the second quarter showed record demand for coins and bars to 508t,
up 56% in value terms. Counter to this, there were outflows from
ETFs; however, SPDR Gold Trust, the largest gold ETF, in August
reported the first net increase in purchases in two months.
The
world's central banks' purchases of gold slowed to 71.1t, down 56%
on the previous year but nevertheless marking the tenth consecutive
quarter of purchases. I would have expected more central bank
buying; however, it must be noted that China has not reported its
central bank purchases of gold since 2009. Despite its silence,
China is known to have added gold to its central bank holdings from
mines it owns within the country as well as from foreign countries
allowed to operate gold mines in China.
