Policy Makers’ Attempt to Stave off European Depression Reminiscent of Fall, 2008 Stimulus

Widely Credited with Staving off US Depression

November 30, 2011

1.             In a move reminiscent of the Fed’s contribution to the 2008 U.S. Bailout, dollars are being printed to provide emergency funds via the ECB to major European Banks. This, combined with this morning’s 50 basis point reduction in Chinese reserve requirements, is the Fed’s answer to weeks of fund outflows from major European banks capped by last night’s S&P downgrade of 15 major banks.

2.             Selected quotes from the article, “Central Banks Take Joint Action to Ease Debt Crisis,” by Binyamin Appelbaum in today’s New York Times nicely summarize the events:

a.              “The Fed… moved… with other…central banks to buttress the financial system by increasing the availability of dollars outside the United States” (aka Money printing)

b.             “European banks are struggling to borrow the money they need” (aka Run on Banks)

 c.              “It also reflects the broader collapse of funding for European banks, which have been extremely reluctant to lend to each other, and are having trouble selling bonds to investors” (aka loss of ability to replace lost funds)

 d.             “The shortage of dollars in Europe results partly from the pullback of American money market funds” (aka loss of status as risk free investment)

 e.              “Some analysts were quick to note that the program does not address the root causes” (aks as a “finger in the dike” rather than a structural solution)

 f.              the move could buy the 17 European Union nations that use the euro a little more time to agree on a broader plan to stabilize financial markets”

3.             Fresh Memories of the fallout from the Lehman Brothers collapse underscore the commitment to step in as lender of last resort.

 a.              European Banks are larger and more highly leveraged than U.S. banks, relying far more on wholesale funds.

 b.             Wholesale funds have no emotional attachments

 c.              Governments will do everything in their power to stave off the Day of Reckoning at the end of this multi decade “Great Debt SuperCycle.” (a term coined by BCA Rsch)

4.             Widely viewed as a precursor to QE-3, this move offers clear short term support for oversold stock markets which were on the precipice of possible collapse.

 a.              This greatly increases the likelihood of a year end rally that buys time for the World and may hopefully stave off a European Great Depression II in the same way that massive stimulus staved off a Great Depression II in the United States

b.             The old investor adage “Don’t Fight the Fed” could be modified to “Don’t fight the Fed, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.” They are committed to monetizing the debt and may eventually succeed despite worldwide excess capacity that threatens deflation & depression.

i.               Now add Brazil’s Central Bank which cut rates after today’s market close.

c.              Greece and certain other “Club Med” countries are already in Depression with a deep recession still knocking at the door of France, then Germany and even the US

Longer Term Worldwide Perspectives

Ongoing Depression Stretched Out By Politicians Unprepared to Face Pain

Hope Springs Eternal That We can “Muddle Through” By “Kicking the Can Down the Road”

November 30, 2011

1.             We appear to be in the early innings of a long depression which will contain at least two (and more likely three) recessions before this long period of deleveraging runs its course. {Remember that Depressions can span multiple recessions and recoveries as happened in the Depressions beginning in 1837, 1873, and 1929. The current Depression was long overdue and has been repeatedly delayed by credit expansions supported by the “New Finance”}

a.              Recoveries will be weaker and shorter

b.             But downturns should be less severe as pent up demand ultimately buoys economy

c.              Pent up demand in Autos and Housing should help buoy the next recovery after a likely 2012 recession (unless delayed by massive stimulus)

 2.             While Facing Major Challenges, the US is Far Better Positioned than Europe, China & the Rest of the World ….Leading the world out of this Depression with massive new energy finds and technological innovations:

a.              New Energy Development in North Dakota, Texas, Arkansas, Louisiana, Pennsylvania and now Ohio can, combined with known reserves in Canada, Alaska, the Gulf, the Atlantic and Pacific, make North America energy independent within a decade (albeit delayed by well meaning environmentalists)

b.             Unbelievable technological innovation, including nanotechnology, biotechnology, and communication breakthroughs (albeit delayed by weak government schools)

c.              The U.S. is likely in the first inning of a multi-decade U.S. Manufacturing Renaissance supported by a weaker dollar, narrowing of cost differentials, new energy development, and technological revolutions borne of “Yankee Ingenuity.”

d.             Manufacturing Renaissance could be delayed by bureaucracy counterproductive regulations and could even be derailed by social tensions arising socialist responses to perceived unfairness such as income inequality compounded by favoritism & failure to reform our educational system. Pray for revival before we reach that tipping point! 

e.              US Demographic problems is offset by essentially friendly immigration and pales in comparison to other countries such as:

 i.               China with its One Child Policy that ensures that its population will be surpassed India within a generation

 ii.             Japan & Russia which face demographic implosions due to low birth rates & lack of immigration.

 iii.           European Stagnation compounded by statism, socialism and resulting low birth rates in the indigenous population

 (1)          would face demographic collapse similar to Japan were it not for ongoing immigration from the Islamic world

 (2)          But Islamic immigration will inevitably change the character of Europe 

3.             Countries Dependent on Exports to the US face far greater challenges than the US, summarized below:

4.             China faces a Dramatic Growth Slowdown

 a.              We are coming to the end of what has been an effective “Marshall Plan” for China based on China’s currency peg and undervalued Yuan

 i.               The Fed’s Q/E-1 and Q/E-2 tripled the Monetary Base and exported inflation & nascent social unrest to China which has been forced to retrench, yet is in need of growing internal demand

 ii.             Growth in internal demand impeded by (1) one child policy with children migrating to cities, (2) a resulting demographic collapse, and (3) inability to fund social insurance for a population aging far more rapidly than the US

 b.             Chinese growth has been goosed by investment that is over 48% of total output (versus less than 34% accounted for by domestic consumption)

 i.               Empty Office Buildings, “Bridges to Nowhere” and excess manufacturing facilities require demand from Net Exports which are going to fall

 ii.             Loans to State Owned Enterprises (SOEs) are almost certainly fraught with mal-investment which will require bailouts by the Chinese Government

 c.              Chinese Economy is Still Too Small to Compensate for lost Exports to the US

 d.             China’s “inevitable” overtaking of the US economy will be delayed for much longer than is now commonly realized

 5.             Germany faces Serious Slowdown Made Worse by Likely Chinese Downturn

a.              With fewer Exports to the US, China Will Need Less Precision Equipment From Germany

b.             While goosed by a weak Euro, Germany’s Export-Led Economy Will Also Be Hurt by US Manufacturing Renaissance

c.              Germany’s need to backstop the GIPSIs will weaken its economy

6.             Brazil Will Suffer From Lost Exports to China & weakening commodity prices

7.             Australia Will Suffer From Lost Exports to China & weakening commodity prices

8.             Japan Faces a Demographic Nightmare compounded by almost 200% Gross Debt to GDP

a.              Will soon be unable to help finance Deficit Countries

b.             Aging Japanese Baby Boomers repatriate foreign investments into Yen, strengthening the Yen and weakening their competitiveness

 9.             Russia Faces Demographic Nightmare

 a.              Russia suffers from relative absence of Rule of Law

 b.             Russia’s energy wealth will also be dissipated by development of new US Energy

 c.              Russia’s problems compounded by high rate of both deaths and abortions.

d.             Shorter lifespans take some pressure off of Russia’s social insurance system


Tis the Season To Be Thankful We live in the United States! A New Dawn Could Arise by the 2020s!



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