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The Recession That Won't End


The world's major economies are experiencing a concurrent slowdown -- and until debt issues are addressed, slow or no growth will be the norm.


The Road to Ruin in Europe

Greece is near the end of its tenure in the European Monetary Union (EMU). Deposits continue to flee the country. Worse, 20% of Greek bank loans are now non-performing (that number is only 9.5% in Spain, a record high there and causing increased concern). The non-performing loans in Greece are bound to get worse, as the government does not have enough cash to return VAT tax refunds to small businesses which depend on such rebates for survival. So, it is highly likely that the non-performing assets in Greek banks will rise as small businesses fail.

With its economy continuing to contract (6.2% this past quarter) and the EMU's insistence that it implement more austerity in return for emergency funding, Greece has to be near the end of the road with the euro.

Meanwhile, the party continues in Italy. Despite the threat that they could be cut off from any capital funding, and despite the talk of it, there is no austerity here. According to the Zerohedge blog of August 13, Italy's fiscal deficit continues to balloon. The table below shows that Italy's monthly deficit is rapidly expanding from €2 billion/month in 1999 (prior to joining the EMU), to €9.5 billion/month over the last nine months. This is what you get when you hire an unelected bureaucrat (Mario Monti) to run your government.

Europe is in recession. While the northern countries, like Germany, have not yet entered recession, all of the indicators point that way. Things are going to get much worse in Europe before they get better. The first condition to heal a malady is to recognize what it is. So far, the European politicians have yet to recognize that the underlying problem is too much debt and overpromises.

The Worldwide Slowdown

In China, the housing bubble is deflating. Prices are falling rapidly. Lack of new construction has had a worldwide impact on the prices of raw materials, especially iron ore, coal, and other industrial input products. The slowdown in demand and fall in raw material prices has significant negative implications for the commodity producing countries like Australia and Canada. The banking system in China, already undercapitalized, is facing major increases in non-performing loans. The Chinese government is going to be spending a lot of its efforts to deal with the non-performance of the projects it began in 2009, rather than concentrating on trying to stimulate new growth. Furthermore, in just a couple of months, China will have a political transition to new leadership (which happens once every 10 years). The new administration will have every opportunity to blame the old one for the economic mess – one of the universal truths of politics.

For the past 20 years, the Japanese economy has been a basket case. Their debt and demographics are truly scary. Debt/GDP continues to grow and their traditional internal funding sources, their post-WWII generation, are retiring and have become net fund demanders. Japan has never depended on external funding, but now they will have to. That means interest costs, already 20% of their budget, will be rising. Inflation appears to be the only alternative.

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