A Bigger View of the Elephant

In a country where the main political debate centers on 1% of the population, an overall view of the country and the world might seem too much to digest. After all, don't we have our hands full with this 1% argument?

The following contains a number of snippets from the Simon Hunt November/December Economic Report made available by the Mauldin Report. It contains some nice observations about the world economy, its direction and some predictions. Some are quite shocking, like the vulnerability of the Chinese economy and the low likelihood of inflation. There is also the suggestion, not included, that businesses will try to move closer to their homes to manage costs better. As always there is a buyer for every seller, a seller for every buyer and, in general, at least two sides of any argument. These guys may be completely wrong, or half wrong. But it is a concise presentation (perhaps ineptly summarized) and worth the consideration.



The monetary assumption that what was appropriate for Germany in the EU would be appropriate for all of the other members. Herein lay the fault lines. The weak members were able to get a German credit rating which meant that they could borrow to consume goods and finance industry and infrastructure that otherwise would not have been possible. Banks, too, were happy to lend to the governments of these countries because they could take the loans to the ECB and use them as collateral for even more borrowing. A credit frenzy followed which has resulted in today's debt crisis.

The world will suffer from rolling recessions starting either next year or in 2013 lasting to about 2018. Global industrial production should fall by an average of 0.25% a year during this period.
• By then the process of deleveraging should have run its course. The world beyond 2018 will be a different place. World industrial production should average around 3% a year to 2030 compared with an average of 3.3% in the period 1990-2010. Monetary policy will also be quite different; global money supply will match global GDP, not the massive increase experienced since 2008.
• Asset inflation will be virtually non-existent

Each of the three principal pillars of the world economy, the USA, Europe and China, has their own problems, but they boil down to two simple ingredients: debt and demographics
The choice before Germany is then simple but harsh. Either to throw caution to the winds and hope that by printing money the Euro Zone can be saved and stability created or to accept the painful truth that "the Euro is an incoherent nonsense which, in its current form, is doing far more harm than good", as Liam Halligan wrote on Sunday.

The financial fate of Europe's banks and its governments are inextricably linked: because the banks are the primary source of funding for government deficits, government debt represents a large proportion of the asset base of most eurozone banks. Insolvency of one therefore threatens the insolvency of the other
In the end, the only way out is to increase saving." This is part of the process of deleveraging which is likely to take until around 2018 to run its course. These years will be characterized by rolling recessions and deflating asset prices interspaced by short periods of recovery.

Debt is bad for growth. "In the end, the only way out is to increase saving." This is part of the process of deleveraging which is likely to take until around 2018 to run its course. These years will be characterized by rolling recessions and deflating asset prices inter-spaced by short periods of recovery. So, as public debt rises and populations age, growth will fall. As growth falls, debt rises even more, reinforcing the downward impact on an already low growth rate.

"Aging will cause growth in household financial wealth to slow by more than two-thirds across countries we studied (USA, Japan, and W Europe), from 4.5% historically to 1.2% going forward. The slowing growth will cause the level of household financial wealth in 2024 to fall some 36% or by $31 trillion, below what it would have been had the higher historical growth rates persisted."

A surprising development is that the demographic profile of the USA is so much better than that of China. Once the USA puts its financial house in better order, which it will if not willingly, its growth expectations will be better than China's. As we say in Yorkshire, "Think on". For China, based on simple fundamentals, growth has peaked.