Europe Crumbles Due to Lack of Demand

Europe's economy is crashing in such a way that even the least objective ideologues in Germany now must begin to feel uneasy.

It is not only Greece, but now Spain also (the country that had budget surpluses before 2008) crashing into unambiguous economic depression.  Domestic demand continues to crumble rapidly in Spain, so that one wonders if the entire economy there might sag into social chaos.

But the reality isn't that some countries are in serious straights while others nations are doing fine, so that the overall situation might be sanguine....

No.

Europe as a whole is in sharp decline.

Consider the straight dope -- even as The Economist scrambles to blame monetary policy (but not the Euro!) we see the starkness of the failure of austerity:

IT IS a car crash of a data release. One simply can't look away. Hard to know precisely which part of the euro area's latest unemployment report is the most grimly compelling. The overall rate, at 12.1%? In the spring of 2010 unemployment rates in America and the euro zone were effectively the same at about 10%. There is now a gap of 4.5 percentage points. Total unemployment? In the first three years of the downturn America did far worse than the euro area, adding some 7.5m workers to the unemployment rolls to Europe's 4.7m. Since then total unemployment in the euro area has risen by another 3.2m while America reduced the ranks of the jobless by 3.5m. The euro area now has some 19.2m unemployed workers.

The reality remains that Europe is crashing due to the pan-European trade imbalances created by the monetary union (which prevents natural price adjustment and easy rebounds by sinking economies) -- this increases the job strength in Germany, and that increase specifically comes from taking most available jobs away from the weaker economies via the Euro lock on relative prices.

What is the soundest, best economy in the world right now?  Clearly that of the U.S.

Why?  Demand -- people wanting to buy goods and services in sufficient amounts for an economy to function.  The U.S. has adequate domestic demand.

Economies depend on demand and production, equally.  But production exists around the world in abundance.

Demand is in short supply.

Unlike skating-on-thinning-ice Germany, deeply dependent on exports, or China, deeply dependent on exports and on financial bubbles, the U.S. in contrast has adequate demand at home and little financial froth.

The U.S. is stronger than Europe largely as a result of the just-in-time demand in the U.S. economy created by the stimulus of 2009-2010, and since then, due to a more cautiously gradual reduction in deficit spending than that of misguided Europe.

The U.S. and Europe both have similar overhangs of excessive private household debt weighing us down.  But Europe tried rapid deficit reduction by cutting spending -- which backfired and resulted in deficits as a % of GDP rising in many Europeans countries.   Because of weak demand, cutting government spending simply started downward spirals in European economies.  Not, of course, in the European country that has had an profound pricing advantage over the others for more than a decade, locked in by the common currency (the Euro).

At this moment, U.S. strength is the sole bright spot in the global economy.

While Germany has been like a fire burning down a house (Europe), the U.S. is like a massive motor humming along.

But will it keep humming?

As China and Germany continue to force unemployment on the rest of the globe by consuming so much less than they produce, their massive trade surpluses threaten to eventually sink us all, and only a radical change towards more domestic consumption in these two economies offers any long term hope of avoiding the specter of war.

Cobert Reviews Banger and Mash, or "RR" as They Say

After the electric news of 4-5 days ago that basically the entire idea of Rogoff/Reinhart that national debt levels above 90% retard real growth is just...well, let's say quite a stretch, as in bending over backwards, I found Cobert's treatment of the fracas below quite funny and even satisfying finally.

James Hamilton suggests a more conventional worry -- interest rates will rise and that will cost a lot.

That they haven't for Japan should make one 2nd guess this, and if one does, the "global savings glut" springs instantly to mind.  Now, since the global savings glut is cultural in origin (think Chinese one-child policy combined with falling birth rates across the globe....), well, guess what, US interest rates are going to under-perform expectations we might imagine, and likely be under the weight of massive quantities of money looking for a home for....well, for decades actually, regardless of any ups and downs.

At some point you just have to realize this was clear all the time, but....mass psychology is nothing to take lightly we all know.  Here's some fun.

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Obama's Election Night Victory Speech

If you are like me, you got some sleep and promised yourself you'd see this speech...

Thoughts on the Election

One has to wonder whether any smart person really wants to be president during 2013-2016.

I think that both men have had second thoughts, and at times shown real ambivalence about winning, which comes out as surprising political mistakes that could throw the election.

We shouldn't be surprised.

After all, when overall global savings looks set to exceed demand and investment -- global private savings remaining high while global governmental spending decreases -- we can expect tough times and then recriminations in 2016.

Regardless of current rhetoric and mythological language.

One might say something like "Government doesn't create jobs,"  but one actually knows, down inside, that what creates jobs is for money that is earned to be spent or invested in investments that result in increased spending.  Investments not in assets bubbles like stockpiling gold or London houses, but more traditional, normal investment -- money for new roads, buildings, science, machines, education, home renovation, capital investment in technology, all the productive things the word "investment" has meant in healthy economies for centuries.

If so much money continues to be saved (think China, Germany consuming a fraction of what they produce) so that savings considerably exceed spending and productive investment, then you have a problem.

Unless the abundant savings is all borrowed and used to build roads, educate students, improve technology, etc., then the economic circular flow of money that supports all of our jobs and income gets attenuated, constantly, until something radically increases spending (as did World War II and it's preliminary buildup)....

Regardless of rhetoric, both of these men are smart enough on some level, even intuitively, to know this, and be aware of the real situation, the real way the economy works.

So why would anyone really want to be President in 2013, when China and Germany will continue to fail to use as much as they produce, exporting unemployment around the world, while the US looks likely to reduce it's deficit spending, and thus use less of the excess global savings?

I think lately both men have come to terms with this situation, and set their own internal goals.

For Obama, I think his goal is to see through his initiatives -- green energy, education support, continued federal dollars for science, even health care reform -- things that provide a stronger future for the nation.

Even health care security helps the economy -- when workers feel more secure about their health care, they are more willing to buy a new car or tip the waiter more at a restaurant.

Essentially, when there is abundant unused savings, the strongest national economies can borrow at rates that hit record lows, because the markets are looking for any safe yield, even at 1.5% or less.

How fundamentally strong is the U.S. economy?   Many billions of free floating dollars choose U.S. Treasuries as their home.  Why?  In part because economic strength depends on market demand -- consumer demand -- and the U.S. has the most of that in the world.  Ergo, this is the most fundamentally strong and sound economy in the world.

But that doesn't mean a titanic mortgage credit bubble and collapse is easy to ride out.  It's no ordinary storm.  This ship could be steered sideways to the waves and find itself truly foundering, instead of only riding rough seas as now.

So why does Romney want to be President?

For Romney, we are forced to speculate.


Is it Power?  A vision of personal greatness and prestige?

Does he have actual beliefs, in spite of changing positions?  Actual beliefs that are passionate, in spite of the smoothness and clear acting?

He's a tremendous Story Teller, one of the best around.

While the U.S. has done far better than any other nation that suffered a major housing bubble and collapse in the last few years -- better in employment, better in the general economy, and best in the world in reducing total debt of the combined public and private debt load (private debt in the U.S. has declined far more than public debt has increased)....

Romney has made it seem, through masterful story telling, that this very good result is a real failure.

Imagine a student who does the best in a class of 20 on an extremely difficult test, scoring only 70%, and then a bystander labels that result not as a success, but as a failure, and works to convince many other people that the success is a failure.

But what is Romney really after?  What does he really want, himself, personally?

Perhaps he wants to be the Boss.  It's a theory.   To project power around the world.

Instead of walk softly and carry a big stick, it appears from his own words at times that Romney would like to walk aggressively and be quick to whack some heads when an opportunity shows up.

Is that just bluster meant to nab a few votes, or is it a real attitude?

From his description of Obama projecting weakness -- as if all the fighting and resolve we have shown becomes weakness if we are diplomatic in language abroad -- it seems Romney imagines that acting hard nosed and seeming uncompromising to some other peoples is good for security.

It is good for losing some friends and alienating some good will and losing some soft power influence, the kind that actually matters over time.

The wise know that it is better, safer even, to be loved than to be feared.

But, unlike Obama, Romney can imagine that the ease with which he exercised power at Bain Capital is a way to lead a nation and an economy.  He can imagine this because he hasn't faced the detailed information and reality that Obama has.  He hasn't been disillusioned of his delusions, yet.

Hopefully, he won't have to chance to be disillusioned in that way.

Update: Good News! House Prices Much Lower! (or What Would Really Help America)

Do Americans realize how truly expensive houses have been? Reading typical headlines, you'd think house prices are now low.

But they have only returned to the upper range of the 1990s (with inflation!), and are not cheap, not at all.

We know millions failed to realize they could not afford the houses they bought and millions speculated. But we have an presumption that a majority of families making a typical purchase in 2003 or 2007 were making reasonable choices, and just got unlucky.

I'm not referring to a family with $60,000 income buying a $280,000 house.  I mean the more mainstream purchase -- a family with $70,000 income buying a $230,000 home or a $250,000 home (or worse).

In short, what we have considered normal.

As a nation, we lost touch with reality in a profound way.  Many of us, not a few.

Careful analyses, such as this one, agree that buying a home priced above 3 times annual household income typically puts a household into a money squeeze, and endangers their financial future.  A maximum price of 2.5 times income is a better guide for affordability.

So what is it like living in a house that cost 4 times the household's annual income?  Something akin to living, financially, in a weak stone building in an active tremor zone -- setting up, practically asking for, a bad outcome over time.

That family with $60,000 income needs to be looking for a place under $180,000, or better, a place around $150,000 or less!

After all, might they want to have a new car every 10 or 12 years?  How well can a family save some money for modest purchases during retirement?

Might they want to be able to afford to have kids?

It's not a coincidence that the national savings rate declined as housing costs rose.

Let's look at a graph of real (inflation adjusted) house prices from Calculated Risk:
(click for larger image)

We are only close to the 1990s normal after adjusting for inflation.  But, remember? -- the 1990s were good times economically.

Why is such logic beyond the mainstream press and media?  Because our popular view on housing prices "improving" is really a psychological desire for retirement security.  People wish for El Dorado.

El Dorado has vanished, again.

You may have noticed the news that house prices have started "recovering" (rising) in recent months.
 
Suppose prices rise 5% year over year. We could expect headlines assuring us of happy consequences. We'd hear price increases are a reason to feel better about the economy.

Housing costs more -- good times are here again.

No matter if more careful reporting mentioned increased construction, the real subtext, even the open message in most media would amount to 'Hurray -- Houses Cost More!'

How imbalanced are we, mentally, as a nation?

We can't seem to fully accept that the wealth of the last decade was....truly, really, an illusion.

Fully, utterly an illusion.

But, let's think for a moment about what would actually be good for America.  What would be good for America is for house prices to be lower.   Lower would be encouraging for the economy.  Why?

More families could afford homes.  So, more would buy.

Then builders would employ more people than now.

Families buying lower-priced homes could afford to buy more goods and services instead of less, over time, simply because they would have more money to spend.

Most families would be less stressed, as the local economies and thus the national economy did better and everyones' earnings were higher.

Financial stress harms families.  The ills are many.

Higher housing prices harm America.

...

Past recoveries from "financial crises" -- such as major housing bubbles and busts -- typically take 7, 8, 10 years, or more. Japan's true recovery took about 14 years.

Will it take us 12 or 14 years to think a household with a $70,000 income should be shopping for something more like a $170,000 house?

_____
Update 9-13:

While a very typical summer bounce in house prices has indeed led to endless headlines suggesting a "recovery" in housing (as if low prices were harmful), there are good reasons to expect yet lower inflation-adjusted prices in the coming years.  We've had a bounce from pent-up demand and some investor demand.  Neither of these will last.

The two strongest factors that will weigh down on future prices are:

A) Baby boomers will increasingly want to downsize and/or move to better retirement areas, while younger families frankly have less means to buy expensive homes, and less inclination.

B) The global economy is severely out of balance in demand and consumption.  Since population aging in Europe, China and Japan will continue to drive an impossible desire to save at a very high rate in ratio to workers' productivity for the next decade, the global imbalances likely won't improve without a overwhelming game changer, such as another Great Depression.
Since a Great Depression will be avoided with whatever spending is necessary, my expectation is for lasting economic slowness and income stagnation or deterioration around much of the world  (unless, for instance, the US takes bold action on trade fairness/manipulation).  Weak incomes will translate to weak house prices.  In inflation-adjusted terms, I expect house prices to be significantly lower in 10 years if the US continues to allow Chinese mercantilism to suppress our growth.