Fra Mauldin Investorinsight newsletter
(PS: bemærk i øvrigt grafen, hvor der måles på BNP vækst i forhold til andelen af den offentlige sektor af BNP – Danmark er på en dumpeplads med Frankrig)
If Draghi gets his way on QE (I would take the “over” on this bet), the euro is then likely to weaken, and the crisis may be postponed for a few years. If he doesn’t, it is entirely possible that the euro will strengthen even as the Eurozone economy weakens, and that interest rates in countries with outsized government debt and economic problems will see their interest rates begin to rise. Now throw into the mix the Greek election on Jan. 25, which is likely to give control of the government to a party that wants to significantly devalue (or completely do away with) the Greek debt, and you heighten volatility. The simple fact of the matter is that the Greeks have 175% debt-to-GDP; and as I said four years ago when the problem was said to be “solved,” the Eurozone’s bailout of Greece merely kicked the can down the road to the day when the Greeks would end up defaulting on even more debt. It now seems we have come to the end of that particular road. The Germans and the French say that if the Greeks don’t want to pay they can leave the euro. The Greeks rightly point out that physically, mathematically, they can’t pay – but they don’t want to leave the euro. Try and figure this one out. It’s not an economic decision; it’s a political decision. Predicting what politicians will do, especially in Europe, is particularly problematic.
I want to thank Paul Krugman for calling to everyone’s attention in his recent New York Times column my contention that France will be every bit the problem that Greece is. Of course, he said that in the context of pointing out that France is now borrowing long-term money at 0.8% and that (at least so far) I have been wrong. “Where is the French time bomb?” he asks. My reply is that it is still there, ticking away quietly in the background. If you have a neo-Keynesian ear, you can’t hear it. I hope he will be equally diligent in drawing attention to the outcome of my call in four or five years. Actually, I hope that I am wrong about France. The world will be better off if I am: France matters.
Sidebar: Paul (may I call you Paul?), you also called me an inflationista. I truly must object. If anything, I am a deflationista, since I have banged my deflation drum for well over a decade and a half. I was aggressively recommending long US bonds in the ’90s. I actually agree with you that those who thought QE in the US would cause hyperinflation and the demise of the dollar were missing the point. I have produced numerous columns explaining all that. It still doesn’t mean the latest QE was a good idea or accomplished anything useful over the long term.
You might have arrived at the inflationista label because I am a debtophobe – I see many of the world’s ills as caused by too much debt, held by governments that are too large relative to the size of their economies. A graphic depiction of my concern can be seen in the following chart, from a recent Bank Credit Analystreport, which shows that the larger government spending is as a percentage of GDP, the lower growth is per capita. Japan grows more slowly than Europe, which grows more slowly than the US; and it seems to me there is a direct relationship to the amount of debt in the system. To pretend that too-high levels of government debt do not affect growth is simply not mathematically reasonable. Thus my concern.
While Spain, Italy, and the other peripheral countries all have growth concerns, I think the linchpin to the entire eurosystem is France. In the chart above, we find France in the lower right. France is ranked 62ndglobally in terms of competitiveness, some ways behind Albania. The reforms being proposed in France are simply tinkering around the margins. The absolute best the country can hope for this year is about 1% GDP growth, but it seems more likely that it will slip back into a triple-dip recession. Without a credible ECB quantitative easing program to help keep interest rates low, when French interest rates begin to rise, they may do so slowly at first; and then they may do so all at once. Then France will indeed look like Greece. Will Germany then finally allow a QE program to shore up their most necessary partner in the European Union? Can they do so without requiring some kind of fiscal union? This all suggests to me a period of great volatility and slow growth.
The French dilemma is further exacerbated by the growing strength of Marine Le Pen and her National Front Party. Under the guise of “economic patriotism” (whatever the hell that is), they are openly protectionist and believe “protectionism makes the state stronger.” They believe in large government. If Marine Le Pen is the answer, France is asking the wrong question. But given the recent tragic events in Paris, it is the answer they may get. Note this paragraph from a recent Telegraph column:
[Marine Le Pen] objects to all forms of globalisation, including free trade and immigration, and has toned down the fascist rhetoric, making her party more palatable to disillusioned centrists. The regional elections in March will give us an early clue to any shift in opinion. What is certain is that unless the mainstream political establishment finds a way of regaining the initiative on law and order as well as the economy, it is no longer inconceivable – though still unlikely – that she could one day win an election. This would be catastrophic, not just for the business community and for investors, but also for everybody else in France, in Europe and around the world.
(I am as saddened and outraged as anyone about the Paris bombings. My deepest sympathies to all the family members and to the country. The Muslim world needs to be party to a serious conversation about what it means to be part of a global civilization. To that end, I was encouraged by a recent speech by Egyptian President Abdel Fattah Al Sisi at Al-Azhar University in Cairo, the very heart of Islamic learning (excerpted here – subscription needed), in which he forcefully called into question the acceptance of violence and terror by Muslim clerics. We need to see more of this from politicians and clerics in the Muslim world. Quite simply, the Western world does not understand the apparent condoning of beheadings, kidnapping of teenage girls, rape, and killing of those who do not “believe correctly” – violence supposedly perpetrated in the name of their religion. Where are the fatwas against terrorism? I am sure that Al Sisi took such a stand at some risk, as have others. I read in Time magazine a most thoughtful response to the Charlie Hebdo shootings by Kareem Abdul-Jabbar (yes, the same gentleman who scored the most points in NBA history), and I commend it to you.)
Given that the potential crisis in Europe is controlled by political decisions in Germany, there is no real way to develop a timeline, but I sincerely doubt that the next Eurozone crisis can be postponed for five years. We will go into more details in future letters.
