The confluence of economic nasties is bulding up
China is pulling out all the stops to slow its economy down. The deceleration is working….up to but not including the main problem, inflation.Chinese officials today reported that the country’s consumer price index rose 5.5% in May from a year earlier, up from April’s 5.3% rise and well above the official full-year target of around 4%. Sound familiar? New figures out today show that UK inflation remained stubbornly at 4.5% in May – more than twice the Bank of England’s 2% target
7,000 miles to the west, Geli in Berlin and Jean-Claude in Bankfurt are still horns-locked in the eternal argument about when debt forgiveness is default. This is getting a tad embarrassing, as the EU bigwigs are meeting today: one somehow feels that Frau Merkel will not be gazing into Trichet’s eyes, and whispering, “Ach Liebschen, du bist mein Hutnummer”. Especially as the French ECB Head has said only “a quantum leap in economic governance” will now halt the EU’s slide into history. He’s not got much chance of that, given Hungary has the revolving Presidency at the moment – and Hungary has told both the IMF and the EU’s Brussels Schutzstaffel to go away in an Anglo-Saxon manner in the past.
Obviously trying get the oysters in before the tide, the Greek Government had a garage sale of it’s useless junk auction of its Treasury Bills, raising €1.625bn at a yield of very nearly 5% – fully eight basis points higher than at the previous month’s auction, and the day after credit agency S&P left its debt rated at just the three notches above default. This means that either the sovereign debt markets are insane, or enough people out there are convinced that in the end, the EU will cough up. It’s entirely possible that both explanations apply: if the current trend continues, the yield will be 9% by next October.
The situation is absolutely, positively, 100%, inevitably, irreversibly, obviously unsustainable. But apart from that, the outlook remains uncertain.
7,000 miles further west, Barack Obama gave a televised interview today in which he warned that further delay in raising the US Debt ceiling could reverse the fledgling recovery and trigger a new economic meltdown. Given there never was a recovery and the meltdown is already under way, now is the time for all people of sound mind to worry a lot. To make matters worse, Ben Bernanke is talking about the very same ceiling a few hours from now. It seems unlikely he’ll say that the ceiling is fine where it is, so the markets will get the jitters about this too.
They’re already jittery that Ben’s dogged persistence with Zirp is helping US inflation to get out of control as well. Ben says it’s just a blip, but then, those nice men in the white robes over at Opec are playing games again….and you simply never know where that might end.
There is a trend here, and it’s not hard to spot. It suggests as follows:
1. The US and the UK are in Stagflation, and have no clue how to get out of it.
2. The eurozone is denying its stagflation, but the price of the ClubMed euro makes it a certainty – and the inevitability of defaults means a falling euro value cannot be avoided either. Fine for Germany in the short term, but also doomed to create stagflation when German raw material costs rise, and consumption elsewhere drops.
3. The Chinese are deliberately creating an economic slowdown, but inflation remains stubbornly high. When the inability of Europe and the US to consume has an effect, China will suffer stagflation as well.
Thus, the idea that we’re about to suffer a global depression accompanied by hyperinflation seems very hard indeed to explain away.
In a desperate (much too late) attempt to stop the process, China’s customers will come under enormous pressure to raise interest rates.
Very shortly after that, the US and UK debts will become unserviceable….exacerbated as they are by poor economic figures, and very nervous sovereign lenders.
I’m going away for a long lie down now. I may or may not be back later.
The Slog 