Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Europe’s Depressing Economy Dog Days of Summer

Economics / Euro-Zone Aug 27, 2014 - 11:33 AM GMT

By: Steve_H_Hanke

Economics              As we entered the dog days of summer, a flurry of negative economic news surfaced. The news from Continental Europe was worse than anticipated, catching most observers by surprise. Those who were caught off guard failed to keep their eyes focused on money and credit. In addition, they neglected to gauge geopolitical events and the state of economic confidence.


Money and credit fuel economies. Without enough fuel, economies stall. Moreover, money dominates fiscal policy. If monetary policy is loose and fiscal policy is tight, the economy will grow. Fiscal austerity won’t throw things into reverse.

             For example, when Bill Clinton entered the White House in 1993, the structural fiscal deficit was 5.3% of potential GDP. In the ensuing eight years, President Clinton squeezed out the fiscal deficits. When he left office in 2001, the government’s accounts registered a structural surplus of 1.5%. Those Clinton years were marked by tight fiscal and loose monetary policies. The result was rapid economic growth. The reverse occurred in Japan during the 1990s. In an attempt to restart the economy, Japan engaged in repeated, massive, fiscal stimuli programs. These programs failed because monetary policy was tight.

             The endless, post-crisis talk about fiscal austerity is misguided. When an economy is in a slump, all eyes should be on monetary policy.

             With this monetary perspective, let’s take a look at recent news from Continental Europe’s three largest economies: Germany, France and Italy. Germany, Europe’s economic locomotive, surprised everyone, shrinking by 0.2% in the second quarter of the year. The accompanying German money and credit chart tells the tale. Since early 2012, the money supply, broadly measured, has registered very anemic growth and credit has been declining. This tight monetary stance, coupled with the economic sanctions blow back from Russia, has taken the steam out of the German locomotive.

             Recent economic data from France weren’t much better than those from Germany. Growth was flat for the second quarter in a row. With no growth, and no growth in sight, Michel Sapin, the French finance minister, threw in the towel and announced that France would not be able to meet its fiscal deficit target of 3.8% of GDP. A review of France’s money and credit picture shows why the economy is flat lining: money and credit growth have been flat since early 2012.

             Prime Minister Matteo Renzi’s Italian honeymoon ended abruptly in early August, when Italy achieved a rare feat. It entered a triple-dip recession. Yes, Italy’s economy contracted for two successive quarters for the third time since 2007. As the accompanying chart shows, money growth in Italy has been flat for some time, and credit has been slowly shrinking since early 2009.

             Why are Continental Europe’s three largest economies in the grip of monetary austerity? To answer this, we must revert back to John Maynard Keynes at his best. Specifically, we must look at his two-volume 1930 work, A Treatise on Money – a work that Milton Friedman wrote about approvingly in 1997.

In particular, Keynes separates money into two classes: state money and bank money. State money is the high-powered money (the so-called monetary base) that is produced by central banks. Bank money is produced by commercial banks through deposit creation. Keynes spends many pages in the Treatise dealing with bank money. This isn’t surprising because bank money was much larger than state money in 1930. Well, not much has changed since then. Today, bank money accounts for about 90% of the total Eurozone money supply, measured by M3.

 So, bank money is the elephant in the room. Anything that affects bank money dominates the production of money. Bank regulations and their application have been aggressively ramped up since the crisis of 2009. These new regulations have been ill-conceived, pro cyclical, and fraught with danger, as the charts show.

Continental Europe’s economic performance is, however, not only a problem of banks failing to produce money and credit; Europe’s stagnation and slump are also the result of major structural economic rigidities (read: lack of free markets). Mario Draghi, the President of the European Central Bank, has repeatedly called for structural reforms in Europe’s product and labor markets. He has a point. If market liberating reforms were implemented, they would give a much-needed confidence shock to the Eurozone.

Regardless of the particular problem being analyzed or the analytical apparatus used to diagnose it, confidence plays a critical role. Economists have long recognized the importance of confidence. Indeed, most economists find extremes hard to explain – either booms or busts – without reference to it. For example, the American economist Wesley Clair Mitchell (1874-1948) wove “business sentiment” into much of his pioneering work on business cycles. He was not alone.

Members of the Cambridge School of Economics, which was founded by Alfred Marshall (1842-1924), all concluded that fluctuations in business confidence are the essence of the business cycle. As John Maynard Keynes put it, “the state of confidence, as they term it, is a matter to which practical men pay the closest and most anxious attention.” That is, of course, why Keynes put great stress on changes in confidence and how they affected consumption and investment patterns. Frederick Lavington (1881-1927), a Fellow of Emmanuel College and the most orthodox of the Cambridge economists, went even further in his 1922 book, The Trade Cycle. Lavington concluded that, without a “tendency for confidence to pass into errors of optimism or pessimism,” there would not be a business cycle.

Confidence enters into more modern discussions of business cycles, too. Robert Lucas, a Nobel Laureate and member of the Chicago School of Economics, has developed rational expectations tools for economic analysis. For members of the Chicago School, the credibility of government policies (read: their consistency and plausibility) is the major source of changes in confidence, and consequent swings in the business cycle.

The Cambridge economists rely on surveys of sentiments held by businessmen and consumers. These survey metrics are used to construct forecasts of economic activity. As reported in August, Germany’s investor confidence index plunged – fueled by tensions with Russia – to a 20-month low. In France, the manufacturing business climate index has been falling for months. Italy’s consumer confidence index was temporarily boosted, following Prime Minister Renzi’s election in May, but has turned south since then.

If we move from Cambridge to Chicago, we find that the rational expectations crowd points to government policy as a generator of swings in confidence. In particular, these economists believe that the state of confidence hinges on whether governments and their policies are viewed as credible. This amounts to a perception about whether the various elements of a government’s policy are logical and consistent. If policies are viewed as being illogical and/or internally inconsistent, confidence suffers. On this criterion, Continental Europe’s confidence is very low. Many people believe that politicians are serving up a never-ending stream of ad hoc, incoherent, if not contradictory, policies.

Any way one looks at Continental Europe, the economic, political and geopolitical picture is not pretty.

By Steve H. Hanke

www.cato.org/people/hanke.html

Twitter: @Steve_Hanke

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2014 Steve H. Hanke - 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.

Steve H. Hanke Archive

© 2005-2019 http://www.MarketOracle.co.uk - 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