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Many investors still hope that the global economy will
experience a significant rebound in 2013. I guess it is human nature to assume
the optimistic position that our economic fate will turn to the upside with
each new calendar.
In fact, a Bloomberg poll of 862 global investors taken
this month showed that 66 percent of respondents believe in a stabilizing or
improving global economy, compared to just over 50 percent in September. The
survey also indicated that the world economy is in its best shape in 18
months as China's prospects improve and the U.S. looks likely to avoid the
Fiscal Cliff.
In sharp contrast, I believe the temporary illusion of
global stabilization has come from a massive increase in public sector debt,
artificially-produced low interest rates that can never be allowed to
increase and central bankers that have taken their cue on how to conduct
monetary policy from Gideon Gono (Governor of the
Reserve Bank of Zimbabwe).
If the politicians and bureaucrats in Japan, Europe and
U.S. allowed their private sectors to deleverage, if they did not interfere
with the correction of asset prices, if they allowed insolvent institutions
to go bankrupt, and if they did not abuse their currencies and interest
rates; then they would indeed be on a sustainable and free-market based
pathway to prosperity.
However, because they have the collective hubris to
believe recessions can be expunged from the business cycle, what we do see is
the empirical evidence of a government-induced mediocrity in the developed
world, which will only lead to a severe downturn in the GDP in the near
future.
If the current strategies deployed led to economic prosperity,
then international lenders would not have to undertake yet another bailout
for Greece. The nation already defaulted on €172 billion worth of Greek
bonds, which represented 85.5% of the total €206 billion held by the
private sector in the early part of 2012. However, just this week they again
had to restructure their debt by cutting the interest rate on official Greek
loans, extending the maturity of those loans from the EFSF bailout fund by 15
years to 30 years, and be granted a 10-year interest repayment deferral on
those loans.
Turning to China, if government spending was the
solution, then the Shanghai composite index would not be down 20% in 2012 and
now be trading at a four-year low. Also, if central bank counterfeiting from
the ECB was the answer, Spain's stock market would not be down 6% for the
year. And if the U.S. was indeed rebounding after a multi-year recession, why
is the S&P 500 down 4% since the end of this summer--especially in the
light of the fact that it has not gained one point from the level it was five
years ago?
If the global economy was about to make a turn to the
upside, then industrial commodity prices would presage a rebound in growth.
But instead copper prices are down from close to $4.00 per pound in February,
to just $3.60 today. Oil prices were trading close to $100 a barrel in the
summer and have sold off to just $88 today. If the global economy was about
to make a significant move to the upside, why haven't industrial commodities
and equity markets begun to price in that improvement--especially in
consideration of the massive amount of liquidity that has been added by
central banks?
The truth is that the Great Recession was the result of
too much debt, rapid money supply growth, asset bubbles and artificial
interest rates. Governments believe the economy can be remedied by placing
all those conditions on steroids. They are wrong, and when falling real
interest rates finally cause investors to demand a real rate of return on
their holdings of government paper the game will be over.
In an effort to maintain the illusion of prosperity,
politicians on both sides of isle will ensure that the Fiscal Cliff and Debt
Ceiling in the U.S. will be avoided at all costs. Any retracement in
government borrowing of the Fed's phony money will send the economy into a
steep recession. That's because the main borrower of Bernanke-Bucks has been
Uncle Sam. If our fiscal imbalances are suddenly and sharply reduced then the
money supply would shrink, which would send asset prices and the economy
tumbling. And then the mirages of economic stabilization and improvement
would rapidly vanish away.
Therefore, the developed world will continue to be
mired in stagflation, not only next year but indeed until those governments
are finally forced into addressing the real underlying economic problems.
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