Mish's Global Economic Trend Analysis

IMF Admits It Prescribed Wrong Medicine; Is IMF Short for I Must Fail?
Bank of China Warns of Ponzi Schemes; China's Demographic Peak; Birth Rate Comparison China vs. US; "China Will Grow Old Before Growing Rich"
Greece Still the Word; Time is Still Money; Battle of Bailouts; Coca Cola, Greece's Biggest Company, Leaves

IMF Admits It Prescribed Wrong Medicine; Is IMF Short for I Must Fail?

Posted: 12 Oct 2012 12:48 PM PDT

Courtesy of Steen Jokobsen, chief economist at Saxo Bank in Denmark, here is an interesting article via email. Steen writes ...

Is IMF short for I must fail?

Fiscal Multipliers are wrong, IMF admits - the biggest macro story this year

The big story this week is the International Monetary Fund's (IMF) admission that the fiscal multiplier is not 0.5 percent but really 0.9-1.7 percent according to Financial Times article It's (austerity) Multiplier Failure

This is actually not just big news, but massive news! For the IMF to let alone realize and then admit this is central to the outlook for growth and fiscal deficits across all economies. Let's walk through the maths here:

The fiscal multiplier defines that 1 percent of austerity will net cost 0.5 percent of gross domestic product (GDP) - but now the IMF says it is higher. Hence, its whole approach of austerity at any cost is losing its academic as well as practical application.

If the fiscal multiplier is larger than 2.0 percent you have an extremely vicious circle. You are enforcing a diet which will kill the patient rather than heal him, as for every percent you reduce in spending you lose 2 percent in growth.

The bigger the hole you dig, the harder the climb back up! Do you think it is a random decision that the IMF made 1.7 percent the top of its range? Hardly!

The fact that only FT Alphaville in its "The IMF game changer" has spotted and written about this is close to being scandalous. It tells us that the Anglo Saxon press' need for supporting Keynesian initiatives (buying time, maximum interventions and pretend-and-extend) at all costs is done for political reasons rather than for finding real solutions to this crisis which is now spinning out of control as systemic risk is at an all-time high.

The IMF has increased the systemic risk by extending the payback period of central planners' calculations (much lower growth and higher fiscal/structural deficits). The market knew this, but it is such naive forecasts produced by the IMF which dictate policy recommendations for the debt crisis. The IMF is ironically seen as the 'expert' although it has experiences considerably more failure than success in its "helping efforts" - think Asian Crisis, Russia, EU debt crisis! The IMF is asking for your patience - extend-and-pretend squared is here!

It is sad that it took this long though! This has been discussed at length before by me (interview in April with TradingFloor.com), plus in the FT (whose writers deserve much credit). The most prominent voice on this topic has been Soc. Gen's excellent economic team led by Ms Michala Marcussen - who I happened to study with a couple of 'wars' ago at the University of Copenhagen.

What we need now is for policymakers to start producing credible forecasts which politicians cannot misuse. The IMF started this, so will the Federal Reserve, European Central Bank and Bank of England take note? Will the Congressional Budget Office in the US reduce its growth forecast? (See link for how this has been done in the past). Probably not, but the IMF's admission this week is a game changer. You can't save yourself to prosperity, not even in the eyes of central planners anymore! The IMF admission also proves what we have known for a long time: Macro stinks!

Finally, and most importantly, this creates a need for something new - which is the very theme I keep emphasizing. Let's work on creating the fundamentals for the micro economy which will create more jobs. The strongest multiplier, after all, remains taking one person out of the unemployment queue and putting them into a job. This reduces the subsidies needed as the person earns a taxable salary, is probably less ill, feels better, spends more etc. So the real challenge the IMF and other central planners need to realize is: You can help, but only by going away and taking a holiday. The S&P 500 (excluding financials) has a Return on Equity (ROE) in excess of 20 percent this year. It is based on an economy growing at 2.0 percent! So, do you need more proof?

President Clinton is in growth terms one of the most successful US presidents in history. What did he do politically for eight years - except for smoking cigars? Nothing! Belgium was without a government for almost two years and every single macro indicator improved during this spell. I rest my case! Let's have total radio silence for five years and we will all be in a better place!

Wrong Medicine

In terms of governments doing nothing for five years (as in no more stimulus) I am in agreement, if that is what Steen means (but I am not so sure that's precisely what he means). Nonetheless, while were at it, let's get rid of Fed meddling as well.

As for the multiplier theory, the IMF is now saying it prescribed the wrong medicine. What was a .5 multiplier is now a range of .9 to 1.7. Anything close to or above 1 means austerity can never work.

No doubt, Krugman will be crowing "I Told You So" over this, but there is not an Austrian economist anywhere that was in support of the massive tax hikes we have seen. Reduction in government spending was not the problem. Rather massive tax hikes and lack of badly-needed reforms was the problem.

Certainly what we know is austerity cannot work "as implemented" but I said that years ago. We have seen massive tax hikes and few work rule and pension reforms. We needed lower taxes, less government, and massive work rule reforms (and still do).

Blaming the problems on "austerity" will get a lot of sympathy from Keynesian clowns, but they cannot distinguish good medicine from cow patties.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Bank of China Warns of Ponzi Schemes; China's Demographic Peak; Birth Rate Comparison China vs. US; "China Will Grow Old Before Growing Rich"

Posted: 12 Oct 2012 09:08 AM PDT

The Ponzi schemes and off-balance sheet loans in China's banking system are in the forefront of today's news. Reuters reports Bank of China executive warns of shadow banking risks

A senior Chinese banking executive has warned against the proliferation of off-book wealth management products, comparing some to a Ponzi scheme in a rare official acknowledgement of the risks they pose to the Chinese banking system.

China must "tackle" shadow banking, particularly the short term investment vehicles known as wealth management products, Xiao Gang, the chairman of the board of Bank of China, one of the top four state-owned banks, wrote in an op-ed in the English-language China Daily on Friday.

He warned of a mismatch between short-term products and the longer underlying projects they fund, adding that in some cases the products are not tied to any specific project and that in others new products may be issued to pay off maturing products and avoid a liquidity squeeze.

"To some extent, this is fundamentally a Ponzi scheme."

Yuan Loans Trail Estimates

Bloomberg reports Yuan Loans Trail Estimates as Wen Struggles for Rebound

China's new lending was below analysts' estimates last month as the government struggles to reverse a slowdown in the world's second-biggest economy.

Banks extended 623.2 billion yuan ($99.5 billion) of local- currency loans, the People's Bank of China said on its website today. That compares with the median estimate of 700 billion yuan in a Bloomberg News survey of economists.

China's central bank has cut interest rates and lenders' reserve requirements to spur lending, with economic growth sinking just as the Communist Party prepares for a once-a-decade leadership transition that starts next month. While local governments are rolling out plans for infrastructure spending, banks are wary of accumulating bad loans and have failed to make use of extra leeway for offering discounts to borrowers.

Premier Wen Jiabao is "risking handing over a sharply slowing economy to the next administration, a blemish to his otherwise great performance over the last ten years," said Liu Li-Gang, an economist in Hong Kong at Australia & New Zealand Banking Group Ltd. (ANZ), who previously worked at the World Bank. Liu said the central bank needs to cut lenders' reserve requirements.

Korea Slashes Interest Rates

Business Insider reports Korea Slashes Interest Rates

SEOUL, South Korea (AP) — South Korea's central bank trimmed the key interest rate Thursday for a second time this year, as Asia's fourth-largest economy faces mounting threats from the protracted debt crisis in Europe and the slowing growth in the world economy.

Analysts expect that the Bank of Korea, which revised down its outlook for South Korea's economy to 3 percent in July, will further reduce its growth forecast for 2012 and 2013 in its scheduled announcement later in the day.

Singapore Economy Contracts

Business Standard reports Singapore Q3 economic growth slows.

Singapore's economy grew by 1.3 percent in the third quarter, slower than the 2.3 per cent growth in the previous quarter.

"On a quarter-on-quarter seasonally-adjusted annualised basis, the economy contracted by 1.5 per cent, compared to the 0.2 per cent expansion in the second quarter", the Ministry of Trade and Industry (MTI) said while releasing the advance GDP figures.

The Ministry also cautioned that growth could be weighed down by the subdued global economic conditions for the rest of the year.

Hong Kongs's July retail sales growth slows

China Daily reports HK's July retail sales growth slows

Retail sector to remain weak for rest of the year, analysts warn

The city's retail July sales value tumbled drastically as the local retail sales market was weighed by the global economic slowdown and the decrease in mainland tourists' spending. Economic analysts cautioned that the local retail sales will remain weak for the rest of the year.

Birth Rates of North America vs. Asia

Chart from Google World Indicators.

Birth Rates of US, UK, Australia, China, Canada, Korea, Germany

"China Will Grow Old Before Growing Rich"

My friend "BC" emailed the above links along with a few thoughts. "BC" writes.

Developmentally, China is where the US was in the late 1920s and early 1930s, and where Japan was in the late '60s and early '70s, but China does not have the luxury of growing supplies of $10-$15 oil as did Japan.

Banking crises historically occur following demographics-induced credit and unreal estate booms/bubbles. China, Australia, and Canada are next in line for an unreal estate bust and banking crisis.

Demographic drag effects will hereafter begin to occur in China, Korea, and the Asian city-states, especially for China after '14 into the mid- to late '20s. Attempts to increase lending and "stimulus" with a debt overhang will encounter the same structural demographic constraints as in Japan since the mid- to late '90s and the US since '08.

China's growth boom is over, which means that the same for Taiwan, Korea, Singapore, Hong Kong, Thailand, Malaysia, and Vietnam.

China will "grow old before growing rich".

Impact on Commodity Producers

I am in general agreement with the thoughts expressed by "BC".

The impact on commodity exporters like Canada and Australia will be far, far greater than most realize. For further discussion, please see ...

12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Currency Wars, Commodity Prices and Capital Flight; China FDI Contracts 8.7% YoY, 8th Drop in 9 Months

Moreover, while the US is in the best shape demographically speaking, the overall picture is not especially pretty anywhere as retired boomers require medical benefits at an ever-increasing pace with real wages stagnant at best for those fresh out of college.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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Greece Still the Word; Time is Still Money; Battle of Bailouts; Coca Cola, Greece's Biggest Company, Leaves

Posted: 12 Oct 2012 12:32 AM PDT

Germany and the IMF, which in recent past seemed ambivalent at best to keeping Greece in the eurozone, are suddenly acting as if Greece is a life-or-death matter.

First Merkel flew to Greece pledging solidarity, now the IMF chief Christine Lagarde seeks Two More Years For Greece.

IMF chief Christine Lagarde's declaration this morning that Greece should be given two more years to hit tough budget targets embedded in its €174bn bailout programme – coming fast on the heels of German chancellor Angela Merkel's highly symbolic trip to Athens – are the clearest public signs yet of what EU officials have been acknowledging privately for weeks: Greece is going to get the extra time it wants.

But what is equally clear after this week's pre-Tokyo meeting of EU finance ministers in Luxembourg is there is no agreement on how to pay for those two additional years, and eurozone leaders are beginning to worry that the politics of the Greek bailout are once again about to get very ugly.

The mantra from eurozone ministers has been that Greece will get more time but not more money.

Time is Still Money

Quite frankly it is impossible to give Greece more time but not more money. The time value of interest payments is proof enough.

Ever late to the party, the IMF recently changed its 2013 Greek GDP projection from flat to negative 4%.

In my estimation, more downward revisions are coming, including Germany and France.

Battle of Bailouts

With every down-tick in GDP assume lower tax revenues. Will Greece ever get to a sustainable debt to GDP numbers?

Once again the answer is no, and this was perfectly obvious years ago.

Yet the IMF and ECB have stated they will not take write-downs. Peter Tchir discussed this in detail in his T-Report on Greece.

Here are some details from the report, with my additions in braces [] ...

Official Greek Debt is €288 billion. I don't think this includes every bilateral loan made by the EU and certainly doesn't deal with any national central bank loans.

It does include the entire Public Sector debt. The PSI bonds total just over €62 billion. There is about €4 billion of Greek legacy bonds documented under non-domestic law. So of the €288 billion, at most, €66 billion is held outside of the official sector.

[If Greece wiped out €66 billion] it would reduce debt from €288 billion to about €222 billion. From a practical standpoint it accomplishes next to nothing. It will save Greece about €1.25 billion annually in interest for the next 10 years. The annual savings for 10 years would be €1.25 billion for a total of €12.5 billion over the period. Who really believes Greece will make it 10 more years if all they get is a measly €1.25 billion [per year] in current savings.

While crushing the PSI bonds would do next to nothing for Greece's ability to survive in the near term, it would send shockwaves through the bond markets [especially Spain and Italy].

But what happens if the EU or the ECB or the EFSF actually have to take losses?

The ECB is highly levered. It cannot afford real losses without making capital calls. I cannot imagine the ECB making capital calls at the same time it embarks on OMT for Spain.

Hollande is passing implementing some bizarre budget of his own, but last thing he needs to do is cover a few billion of losses on existing loans to Greece. It is the only way to help Greece, but it will make the anti-bailout crowd more vocal.

Across Europe, the reluctance to participate in the bailouts has been increasing. Leaders may finally be realizing they have done too little, but their population (i.e., voters) has been growing more disillusioned and taking actual losses will add to that resistance.

So I see Greece as once again being a focal point for the crisis and think that just like their eventual default last year, there is no good path.

The Good Path

What Peter really means is there is no acceptable path to the Troika. An excellent path (for Greece) would be for Greece to default, tell the Troika to go to hell, wipe out all of the debt, return to the Drachma (backed by silver or gold), and institute badly-deeded work-rule reforms.

Since the Greek leaders are shills for the Troika while simultaneously attempting to appease public unions, what's needed is downright impossible as long as this set of politicians is in office.

In the meantime, debt escalates, unemployment soars, and Greece rots away.

Coca Cola, Greece's Biggest Company, Leaves

The idiots in Brussels and the IMF, hell-bent on "saving Greece" have helped destroy the country. On Thursday we learned Greece's Biggest Company Quits Country.

Greece's biggest company is leaving the country, drinks bottler Coca Cola Hellenic (CCH) said on Thursday in announcing it will move to Switzerland and list its shares in London, dealing a blow to the debt-crippled Greek economy.

"This transaction makes clear business sense," chief executive Dimitris Lois told analysts in a conference call. An overwhelming majority of shareholders have already accepted moving a company which has long complained about Greek taxes.

One of the Troika demands was higher taxes. Did it work?

Unemployment Tops 25%

On Thursday, we also learned Greek unemployment rate hits 25.1 percent in July as recession heads for sixth year.

Youth unemployment is 54% and jobs are vanishing at a rate of 1,000 per day for the last year. So now the IMF wants to give Greece more time, but not more money.

As explained above, that is impossible. More importantly, how could it possibly matter even if it was possible?

The bankers and the IMF helped destroy Greece. There is nothing left but ruins. And in the end, Greece is going to default on all the debt and exit the eurozone anyway.

Expect European taxpayers to foot the bill.

This is what happens when countries take money under onerous terms from the IMF. Spain should be paying attention, but it isn't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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12.10.12

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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