Disappointing Global Growth and Illusion of an Infinite Economy

By the Curmudgeon with Victor Sperandeo




For the better part of the last decade economists believed that "the world was flat," in that globalization would lead to perpetual growth for the world economy.  The thinking was that resources and capital would be very efficiently allocated to generate a wider range of products and services. That would increase global trade and boost economic growth all over the world.


Fast forward to today...Global economic growth in 2014 has been almost non-existent, while estimates have been ratcheting down all year.  There has been hugely disappointing results in Japan, Europe, and China.  The U.S. continues to plod along with sub-trend GDP and productivity growth at ~2% each.  That's nothing to celebrate (unless you're a stock market "investor" cheered on by never ending global central bank money printing or hints thereof.)


Slow or negative overseas economies will eventually worsen the anemic U.S. economic "recovery."  Indeed, the U.S. is part of the global economy. The latest U.S. trade data showed the trade deficit unexpectedly surged up 7.6% in September, due to a big drop in exports to important trading partners Europe, China, and Japan. 


[Till the CURMUDGEON's senior year in college, the U.S. hardly ever ran a trade deficit and was the largest creditor nation in the world. How times have changed...]


Global Economic Numbers Continue to Disappoint:


Global economic reports for October and November have not been encouraging:


-Japan, the world’s third largest economy, reported this week that its economy has already unexpectedly declined into another recession, its third-quarter GDP growth negative for a second straight quarter.


-David Cameron, Prime Minister of the U.K. warned this week that, “The Eurozone is teetering on the brink of another recession.” ECB President Mario Draghi issued another "we'll do whatever it takes" statement and the markets cheered.


-The People’s Bank of China cut its benchmark one-year lending and deposit rates by 40 basis points and 25bp, respectively, the first easing since July 2012. It's a clear sign the Chinese economy is slowing more than its leaders will tolerate and needs the help now.  Note that China's PMI Manufacturing Index fell to a six-month low in November.


-The global Market PMI reports released this week show the overall euro-zone PMI Index fell to 51.4 in November, a 16-month low, while its PMI Mfg. Index fell to 50.4. Both numbers are still above the 50 demarcation that separates expansion from contraction, but just barely.


-Germany’s PMI Mfg. Index fell to 50.0 -- a six month low and a level which signals the economy is on the cusp of a contraction.


-France’s PMI index, already in contraction (below 50) at 48.5 in October, fell further to 47.6 in November.


Combined, the data sets indicate weakness in growth and add to that worries about Japan, and the 2007/2008 global economy looks like it is still struggling to recover years after the global financial crisis.  "Disappointing" is the new normal for global economic growth.


Note:  a very revealing table showing various global economic numbers may be viewed here.  


Has Globalization Failed to Spur Economic Growth?


Sergio Focardi, Professor of Finance at Stony Brook University, thinks global economic growth has disappointed due to the mistaken notion of an "infinite economy."  Sergio wrote in an email:


"The problem is what I call the "illusion of the infinite economy."  At the beginning of globalization there was the belief that the economy is infinite and that you can create any circulation of wealth inequality simply because the economic scenario encompasses the entire world.


But this is now clearly an illusion. China, India, the Pacific area, and Russia are no longer an infinite market to exploit, but a powerful competitor to developed countries, with growth dominated by simple things such as cars, roads, and highways."


[China, South Korea and Taiwan control most of high tech manufacturing, design and assembly of mobile devices, PCs, Wi-Fi routers, and a large chunk of telecommunications equipment.]


Sergio says the response of developed countries (U.S., U.K., Japan, Europe?) has been to print money in an attempt to revitalize their economies.  "This is unsustainable but only a few seem to worry," Prof. Focardi added.


Victor's Cogent Comments:


The key word is "UNSUSTAINABLE!" The expanding of an economy from the U.S., to the rest of the world (to create a much larger market for goods and services) is universally a good thing. 


However, bigger markets need to grow. The typical method used virtually throughout the world these days is to print (and borrow) fiat money which allows those who can gain access to almost "free money."  The banks and multi-national corporations can borrow cheaply and so become the major winners of this central bank gambit.  John Q Public and small businesses are the losers as it's difficult or impossible for them to qualify for loans and they don't own stocks.


Taxes are lower for those wealthy individuals or corporate entities that contribute to the political order, as such campaign contributions are used to buy votes to permit government officials to remain in office or gain additional political power and then reward their donors (but not necessarily their constituents who they were elected to serve).


Those who don't (or can't afford to) contribute are punished by higher taxes and more regulations.  That's "we the people" and small business (most of whom can't easily borrow to expand operations or hire more workers).


Japan is the epitome of this model. Despite the most obnoxious money printing (QE on steroids) to "stimulate" (?) their economy, while raising consumption/sales taxes on consumers to collect more government revenues, the country has experienced two consecutive quarters of negative GDP, which is the accepted definition of a recession.


A man who studied what creates the Wealth of Nations (Adam Smith in 1776) wrote that what is needed to grow the economy was the need for “peace, easy taxes, and a tolerable administration of justice.”


In sharp contrast, the current model, or the move to control the economy, via "Central Planning" (i.e. Socialism), while trying to make this political mentality work with paper money printing has shown clearly that this has not worked for the past six years. Therefore, this model is clearly unsustainable.


As the well-known economist Herbert Stein, chairman of the Council of Economic Advisors for President's Nixon and Ford, said it simply: "If something cannot go on forever, it will stop." His point was that a policy which is based on more (money printing) will stop itself in its tracks. It will do this through either bankruptcy (the entity goes out of business) or hyperinflation (my guess) in due time when an unexpected and uncontrollable crises occurs.


Governments almost always lie to the voters to stay in power.  More interesting is they seem to lie to themselves too. 


For example, all the high-fiving on last fiscal year's U.S. federal deficit reduction to only $483 billion (or 2.9% of GDP) was misplaced, in my humble opinion. Why?  The debt limit was increased by an additional $1.1 trillion!  From $16.7 trillion in 2013 to $17.8 trillion on 9/30/14 2014.


Even more grotesque is it went up $51 billion more after the fiscal year ended. The debt ceiling increase is due to "off-budget" spending. Yet it does not include "unfunded liabilities" of approximately $6 trillion last year.   This is not denying reality.  Instead, it is a fraud on the people that is planned by our government officials.


Where does this money go? $3 trillion goes for all government welfare state expenditures in the U.S. This includes Social Security, all income support programs, Medicare, health care programs such as Medicaid, education, job training and social services.


Instead of strengthening property rights, rule of law, freedom, capitalism, and individual rights, etc. we get more burdensome regulations and increased taxes on employers.  That erodes the basis for new small business formation, which in turn results in lower demand for workers and lower wages.  Meanwhile, big business currently focuses on mergers, stock buybacks, and firing workers to cut costs and boost earnings per share RATHER than expanding their operations via new investments or increased capital spending


Most liberal/Keynesian economists blame the world's problems on "the curse of weak global demand" as Martin Wolf put it in a Financial Times editorial on November 19, 2014. Of course this "curse" is due to the government taking so much from the worker (directly or indirectly) in taxes, fees, licenses and other miscellaneous money collected.


In order to spend, one has to be confident of their income continuing and to be able to save for a rainy day. This is not what governments have created with the fiscal policies of Keynes and monetary policies of largesse- courtesy of the recent crop of central bankers. The ultra-easy money policies were meant as a "short term" fix to the financial crisis of 2008--not as a perpetual iron lung. The reality is those monetary policies are a House of Cards waiting to collapse.


As Ayn Rand put it: "You can avoid reality, but you cannot avoid the consequences of avoiding reality."


Till next time......


The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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