Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 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