Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Gold / US Dollar Inverse Trend Relationship Video - 23rd Sep 18
US and Global Stocks, Commodities, Precious Metals and the ‘Anti-USD’ Trade - 23rd Sep 18
Gerald Celente Warns Fed May Bring Down the Economy, Crash Markets - 23rd Sep 18
Top 3 Side Jobs for Day Traders - 23rd Sep 18
Gold Exodus to Reverse - 22nd Sep 18
Bitcoin Trader SCAM WARNING - Peter Jones, Dragons Den Fake Facebook Ads - 22nd Sep 18
China Is Building the World’s Largest Innovation Economy - 21st Sep 18
How Can New Companies Succeed in the Overcrowded Online Gambling Market? - 21st Sep 18
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

Global Economy Suffers From Hypothermia

Economics / Global Economy Aug 27, 2013 - 06:29 PM GMT

By: Raul_I_Meijer


We've used the analogy before, in particular to describe what happened to the Roman Empire during the latter days of its existence. Looking around various economies in the world today, the same analogy once again comes to mind. One might say that what we see these days is analogous to the more advanced stages of hypothermia.

Early hypothermia may show in nothing more than cold feet, in itself an amusing analogy perhaps. But a body that is exposed to extreme cold over longer periods of time will at some point start to exhibit symptoms such as frostbite, which are the result of the core of the body trying to save itself at the cost of the periphery, the extremities. Typically, a human body, for instance, will lose its toes first because the heart can no longer pump enough blood (heat) to them and at the same time keep the body's core above a minimum temperature.

In our economies we see the same pattern. It is not generally looked at or even recognized, however, since 99% of us live in denial of the possibility that such a thing would even be an option. This is a direct consequence of the fact that, first, all major news makers and decision makers reside in the core, and second, that saving that core while letting the extremities die off is somehow seen as a good thing. Post-crisis policies around the globe are directed at saving the financial system, not the people the crisis has pushed into poverty. Since these people are not seen as crucial to the survival of the core, and the system as a whole, they are - almost ritually - sacrificed on the system's economic altar.

In a reason-driven society one would expect a discussion on the viability and the intrinsic value of the system itself, but our global economic system, as I've said many times before, exhibits far more symptoms of a religion than a rational scheme. Our "analysis" of the system and the crises it goes through takes place in the part of our brain that deals with belief rather than rational thought. Therefore, we are bound, nay, certain, to get this wrong. You might think that a body can survive minus a few digits, but that is questionable, not in the least, to stick with the hypothermia analogy, because additional problems and afflictions such as gangrene are a major threat to the body's ultimate survival.

In our economic systems, we see this in Europe, where a few weeks ago it was claimed that the recession was over. And while that may be sort of true according to some specific dataset, and some specific timeframe, recessions don't of course happen in spreadsheets and datasets, they happen to real people in real streets. And if you would ask the people in the countryside in Greece or Portugal whether they feel the recession is over, we all know what the answer would be.

The core part of their nations may be suffering a bit less, but that's only because the peripheries suffer more. This is a general pattern. Money today can only be made by taking it away from other people, who - paradoxically or not - don't have any to begin with. Our economies only managed to "grow" in recent decades, since about the late 1970's, because we borrowed from ourselves to buy products produced by people working for wages only a fraction of our own, and when borrowing from ourselves was no longer a viable option, arguably 10 years ago, though 30 years might ultimately prove a better estimate, we started borrowing from our own futures and those of our children. While the core, the financial and political system, which had accumulated by far the biggest part of the debt, escaped the blame and often even fortified itself by taking more and more away from the periphery.

Which is why it's nonsense to claim Europe's recession is over. Granted, it's a timely claim, given that in Germany, Angela Merkel faces federal elections on September 22, and we never should have expected anything but rosy numbers to come out and support her bid, but it makes no rational sense. Germany's numbers may look sort of alright, even if you have to wonder how much that has to do with that same election, but we've already seen acknowledged pre-election - in a clear sign of how confident Merkel is - that Greece needs another bailout, and there's no way Portugal will not need one; Merkel and the ECB are just waiting for the politically least damaging timing to announce the next phases. And the Italian and Spanish populations have been forced through the austerity wringer so tightly any meaningful definition of the term "growth" won't be applicable for a long time, if ever, to their societies.

We will see advanced stages of the hypothermia analogy play out globally in the remainder of this year and into the next. In Europe, it will initially reach center stage in the usual suspects around the Mediterranean. What's more, a new member of the club, one with - coincidentally or not - a long strip of Mediterranean coastline will come to the fore. France. Ironically, the Eurostat report that tried to make us believe the recession is over also claimed - as a crucial part of the overall claim - that France is recovering, and even showed a positive growth number of 0.5%. We're moving into theater of the absurd territory here again.

What's really going on in France was described quite accurately by John Mauldin over the weekend in an article aptly named - in our hypothermia analogy -: France: On the Edge of the Periphery, so I don't have to do the details on that anymore. The crux is that if and when the Eurozone loses France as a net creditor, and that point is now as close as it is inevitable, the entire picture changes in a radical manner. Germany may look good pre-election, but if France goes under, that doesn't mean a thing.

Here's what going to happen in Europe: the Cyprus bail-in model will be extended first to Greece, then Portugal, and after that to all other countries that elect to stay inside the monetary torture dungeon model. The too big to fail banks - I think Europe prefers the moniker "systemically important", will be spared (they're what the system sees as its core), and any other investor, bondholder, and "normal" client will be made to pay.

Countries will fight to maintain control of their own largest banks, but they will find that they can't when the pressure keeps increasing. One price the banks have been made to pay for their TBTF status is increasing their stock of the various sovereign bonds of the countries they reside in. Bonds that will now start dragging them down.

In hypothermia terminology, the core of the global financial system is located in the US. It will therefore be the last to be hit by the ongoing deterioration of the "body" as a whole. And that will lead to lots of mistaken assumptions. We see this happening as we speak in the dynamics of the emerging markets. Most stories about rapid growth and increasing political power for them have been based largely on the amount of money invested by the West in their economies. That money is already being withdrawn in substantial quantities, and that process is due to accelerate.

Sovereign bonds all over the globe are plummeting in value, and as a consequence their yields are rising fast. Over the past half year or so, yields on US Treasuries have almost doubled. And since investors - rightly - see Treasuries as much less risky than most other bonds, which they only moved into because Treasury yields fell through a bottom, they are moving back from India, Brazil, Turkey, Indonesia etc., into the US. This provides a noteworthy sideshow to the Bernanke tapering story: if and when the Fed gets its timing right, the disadvantages of slowing down its $85 billion per month purchasing scheme may well be offset to a large extent by money flowing back into US markets. Which would, again, save the core at the cost of the periphery.

But it will not save the US economy; just the core part of it. Inside the US, the hypothermia model is evident in unemployment stats: the official U3 number stands at 7.4% right now, better than a few years ago, while U6 is still at 14%. But those are arguably no longer the main statistics anymore. You need to look at the very definition of a "job". And then find that many things once taken for granted, let's call them benefits, have been gutted to the bone, if not completely vanished. While the difference between U3 and U6 numbers already represents millions of "potential" American workers, even many more Americans have seen the quality of their jobs, and the compensation below the bottom line, shrink like a handful of frostbitten fingers. And since 70% of US GDP consists of consumer spending, this means that any growth will have to come from increased borrowing instead of from increasing wages.

Still, for the next little while, the American media, and the political and financial system they serve, will manage to convince people in the US that things are looking up. In hypothermia there's a phase this can perhaps best be compared to, one we all know and recognize: shivering. A body that gets cold involuntarily starts to shiver because that increases heat production: it is an attempt to maintain a certain temperature level (it's basically a muscle contraction just like most forms of physical exercise).

Be that as it may, the trend is clear: like Germany is the core of the European "body", and New York the core of the American one, Wall Street, the London City, Tokyo and Frankfurt form the core of the global economy. And in order to save themselves, they will all increasingly bleed their respective peripheries to - near - death. In practical terms, what this means for Brazil, Turkey, Indonesia and a whole string of countries like them outside of the core is that their sovereign bonds will plunge in value, and they will need to pay a whole lot more interest to borrow in international markets, while ever fewer potential buyers will be available. Interest on the bonds will rise, interest in the bonds will plummet.

An interesting - outlier - case study comes from India, the world's largest democracy, which just, hot off the press, voted in a proposal it had been talking about for a while, to - heavily - subsidize food for an additional 400 million of its people, bringing the total to 800 million, or 2/3 of its population. While this is really nothing else than the US foodstamp program writ large, you can bet the IMF-World Bank-Shock Doctrine (screw the periphery, hail the core) model already has measures in place to punish the country for deviating from the party line this way.

Personally, I would suggest India tell them to go screw themselves, like Italy and Greece should tell Brussels and Berlin to take a hike where the sun never shines, but in every country so far, the core is the core and it behaves that way. It'll be interesting to see where Delhi stands in a year, if the program hasn't been abandoned before then.

I've had this - admittedly fully irrational, so I never talked about it - idea for a while that if and when Italian and Spanish 10-year yields turn the same, things will start to take off. And sure enough, as I was writing this article, they are creeping eerily close together. But that's just sort of a fun idea. Economic hypothermia is not. That's closer to pattern recognition.

By Raul Ilargi Meijer
Website: (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2013 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Raul Ilargi Meijer Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules