Mish's Global Economic Trend Analysis

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Record Eurozone Borrowing: Public Debt Rises With Recovery; Greece a Small Sideshow Compared to Italy Posted: 26 Jul 2015 04:55 PM PDT The eurozone is supposedly in a state of recovery. However, in spite of that recovery, public debt and debt-to GGP levels are still rising. Austerity is difficult to find in any realistic sense. Please consider Eurozone Borrowing Rises to Record as Recovery Remains Weak. The European Central Bank's programme of quantitative easing has pushed down interest rates to ultra low levels, encouraging governments to borrow more in the early part of this year, despite turmoil in Greece. Across countries that use the euro, average debt to gross domestic product reached 92.9 per cent in the first quarter of 2015, up from 92 per cent in the previous quarter and 91.9 per cent in the same period last year, according to figures from Eurostat, the EU's statistical agency. Greece remains the EU's most indebted nation, with debt equal to 169 per cent of annual GDP, but Italy, Belgium, Cyprus and Portugal also carry government debt that exceeds 100 per cent of economic output. The rise in debt comes despite a pickup in the pace of recovery in the eurozone, with the region's economy expanding 0.4 per cent in the first quarter of this year — while the US saw a contraction. Targets vs. Reality The "Growth and Stability" pact on which the Eurozone was founded limits debt to 60% of GDP and deficits at no more than 3%. Average Debt-to-GDP is 92.9% and rising. Eurostat Data shows Ireland, Greece, Spain, France, Cyprus, Portugal, Belgium, Slovenia, and Finland all exceeded 3% budget deficit requirement in 2014. France and Spain have been given warnings and extensions on numerous occasions. Greece Sideshow By any realistic measure, Greece is just a sideshow for what is to come. Pater Tenebrarum at the Acting Man blog pinged me with this comment: "The true reason for the bust of Greece and other countries - apart from their truly atrocious socialist policies and abominable corruption - is fractional reserve banking. The euro has of course enabled an even bigger credit boom and bust than would have been the case otherwise, but it is not the fixed exchange rate that is at fault, it is the underlying economic policies and the monetary system as such." While the politicians are are scrambling to "save" Greece, please note Italy's Non-Performing Loans Hit a New Record High. The real danger to the euro area probably doesn't emanate from Greece, but from two of its heavyweights, namely France and Italy. A small note in the European press reminds us that all is not well in at least one of these countries, least of all with its banks (currently this is only a "page 16 story", but it has great potential to eventually move to the front page). The note reads as follows: "According to Italy's banking association ABI, non-performing loans amounted to 193.7 billion euro in May, 25.1 billion more than in the same month in 2014. This is the highest level since 1996. Non-performing loans represent 10.1 percent of all loans granted by Italian banks, ABI said on Tuesday." Gigantic Accidents Pater displays many other interesting charts and tables, concluding with ... Greece is really a side-show. The euro zone remains full of accidents waiting to happen and some of them have the potential to become truly gigantic accidents. Italy has a twin debt problem and it is probably only a question of time before its giant government debtberg becomes a concern again – this would put the country's banks into an untenable situation, given they have amassed a great deal of government since early 2012. As long as the ECB continues to pump €60 billion in newly created money into the system every month, such problems can probably be kept at bay. However, this comes at a price, as monetary pumping distorts prices and falsifies economic calculation, which in turn leads to malinvestment and capital consumption that is masquerading as an "economic recovery". The structure on which all this debt rests becomes ever weaker. Illusion of Recovery Papering over problems with cheap money, deficit spending, and give an illusion of recovery. To keep the illusion going, the ECB made Corporate Bond Purchases QE Eligible. According to the ECB's Website is Italian utilities Enel SpA, Snam SpA and Terna SpA - Rete Elettrica Nazionale were on the updated list of QE eligible purchases. What's next is anyone's guess, but anything needed to keep the illusion alive will likely be given serious consideration. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Santelli Exchange with Mish: Public Debt, Taxation, Legacy Issues Posted: 26 Jul 2015 12:27 PM PDT I had the pleasure of being on CNBC last Friday with Rick Santelli. It was the third time we discussed the sorry state of Chicago and Illinois finances. The focus for this interview was legacy issues. Public Debt, Taxation, Legacy Costs Who wants to move to Illinois, with its high taxes, when the vast majority of those taxes are just to support legacy issues like pensions? Chicago mayor Rahm Emanuel recently mentioned hiking Chicago's already obscene property tax structure. Moreover, Emanuel who claims to want to make Chicago a technology hub, just imposed a 9% data streaming tax, effectively nickel and diming businesses and residents alike when pension issues for Chicago alone are close to $30 billion. At the state level, "progressives" in the Illinois legislature have their eyes on your pocketbook as well. They seek to hike Illinois income taxes. It is impossible to say everything that needs to said in a 3 minute time window, but that is all the studio allows. So we focus on one key item, and the central theme this time was taxation solely to support legacy issues. What Needs to Be Done To spare the citizens of Illinois massive tax hikes, the only reasonable course of actions are as follows: Halt defined benefit pension plans for new employees Eliminate collective bargaining of public unions Scrap Davis Bacon and all prevailing wage laws so that cities do not have to overpay for services Enact right-to-work legislation Pass bankruptcy legislation allowing cities, municipalities, and other taxing bodies the right to declare bankruptcy Had options 1-4 been done a decade ago, Illinois would not be as bad off as it is today. Now, even those measures cannot and will not fix the problems. Additional Reading Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering Emanuel Fiddles While Chicago Burns; Public Schools Over the Edge; 9% Cloud Tax on Data Streaming; Emanuel Eyes Property Tax Hikes Instead of tackling the underlying problems, Emanuel nickels and dimes businesses to death, further makes Chicago an uncompetitive place to do business, and threatens massive property tax hikes. Emanuel also expects $500 million from the state even though the state budget (which Governor Bruce Rauner correctly refuses to sign) is $4 billion in the hole. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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