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Canada's Place in the Global Economy

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Cue more ominous music. If this blogger is right, then the entire structure of a fiat money economy has been put at risk. For those of us who remember the 1970's, with its inflationary spiral and finally "stagflation" this isn't a very promising state of affairs. Potential bright spots are the potentially positive effects of disruptive technologies (especially the ones that lower the costs of energy, food and shelter), and the fact that we have come so close to the brink that the only real options left are bankruptcy (like European investors facing 60% haircuts on sovereign debt instruments) or drawdowns of government spending. Option three is chaotic economic collapse:

http://blogs.the-american-interest.com/wrm/2012/06/25/central-bankers-losing-independence/

Central Bankers Losing Independence?

In most western countries, central banks are, at least in theory, wholly divorced from the political process. Central bankers are selected to terms far longer than that of the average politician—and they are typically allowed to oversee numerous changes in political leadership during their time at the helm—in order to insulate them from the rough and tumble of everyday politics. In theory anyway, the central bank concerns itself purely with inflation rates and monetary policy; fiscal policy, tax rates, and other such matter are left up to the politicians.

At the end of the day, this is about the long term sustainability of a fiat money system. If monetary authorities get into the habit of excessively manipulating the money supply, a fiat money system gradually loses credibility. That loss of credibility was a factor in the inflationary wave of the 1970s, and the greater move toward political independence for central bankers was part of the response.

But what if the recent long-term financial crises are chipping away at central banks’ cherished political independence? The BIS (aka the Bank For International Settlements—the bank of banks) seems to think this is happening. In an interview with the Wall Street Journal, the BIS’s Stephen Cecchetti worried that central banks are becoming too politicized:

Mr. Cecchetti echoed those concerns. Central bankers “have been made the policymakers of last resort,” he said. “That’s not where they should be. They can’t implement structural reforms, they cannot put fiscal policy on a sustainable path. This reliance on the central bank makes it so the other actors…get to wait a little bit” in implementing reforms, he said.

The real worry is that the unconventional measures like quantitative easing that central banks have been using are politically motivated. To put it another way, there is so much pressure on central banks to keep the world economy from collapsing, that the banks have lost all autonomy over their policy. Instead of performing an independent function in economic policy, central bankers have blackmailed by politicians who refuse to take politically costly measures to stabilize the economy. Central bankers are faced with an impossible dilemma: do they let the economy and the financial system collapse, or do they take steps to insulate the economy (and the politicians) from the consequences of poor leadership?

The timidity of politicians has forced central bankers into a role that was never intended for them; central bankers today are now the de facto drivers of monetary and fiscal policy, yet, being bankers rather than elected leaders, they lack the needed tools to put their country’s finances on a firmer footing. Untested and increasingly ineffective programs like QE I and II have been the result.

If Cecchetti is right, the entire basis of economic and monetary management in the contemporary world is even worse than the grim headlines from Europe lead us to believe. We may not just be facing a crisis of confidence in the governance structures of the eurozone; we may be facing a crisis of confidence in the ability of modern industrial societies to manage a fiat money system.
 
The Laffer curve vindicated (yet again!), as tax revenues fall in the UK after a rate hike. Politicians never seem to learn, however (just ask Ontario's own Liberal NDP coalition government):

http://danieljmitchell.wordpress.com/2012/07/01/the-laffer-curve-wreaks-havoc-in-the-united-kingdom/

The Laffer Curve Wreaks Havoc in the United Kingdom

July 1, 2012 by Dan Mitchell

Back in 2010, I excoriated the new Prime Minister of the United Kingdom, noting that David Cameron was increasing tax rates and expanding the burden of government spending (including an increase in the capital gains tax!).

I also criticized Cameron for leaving in place the 50 percent income tax rate imposed by his feckless predecessor, and was not surprised when experts began to warn that this class-warfare tax hike might actually result in less revenue because the reduction in taxable income could be more significant than the increase in the tax rate.

In other words, bad policy might lead to a turbo-charged version of the Laffer Curve.

Allow me to elaborate. In most cases, punitive tax hikes do raise revenue, but not as much as politicians predict. As explained in this three-part video series, this is because it takes a very significant reduction in taxable income to offset the revenue-generating impact of the higher tax rate.

But if a tax increase imposes a lot of damage and taxpayers have enough flexibility in their financial affairs, then it’s possible that a tax hike can lose revenue (or, as we saw with Reagan’s “tax cuts for the rich,” a well-designed reduction in tax rates can actually generate higher revenue).

With that background knowledge, let’s now take a closer look at David Cameron’s tax increases. They’ve been in place for a while, so we can look at some real-world data. Allister Heath of City AM has the details.

Something very worrying is happening to the UK’s public finances. Income tax and capital gains tax receipts fell by 7.3 per cent in May compared with a year ago, according to official figures. Over the first two months of the fiscal year, they are down by 0.5 per cent. This is merely the confirmation of a hugely important but largely overlooked trend: income and capital gains tax (CGT) receipts were stagnant in 2011-12, edging up by just £414m to £151.7bn, from £151.3bn, a rise of under 0.3 per cent. By contrast, overall tax receipts rose 3.9 per cent.

Is this because the United Kingdom is cutting tax rates? Nope. As we mentioned in the introduction, Cameron is doing just the opposite.


…overall taxes on labour and capital have been hiked: the 50p tax was introduced from April 2010 (and will fall to a still high 45p in April 2013), those earning above £150,000 have lost their personal allowance, CGT has risen to 28 per cent, many workers have been dragged into higher tax thresholds, and so on. In theory, if one were to believe the traditional static model of tax, beloved of establishment economists, this should have meant higher receipts, not lower revenues.

So what’s the problem? Well, it seems that there’s thing called the Laffer Curve.

…there is a revenue-maximising rate of tax – and that if you set rates too high, you raise less because people work less, find ways of avoiding tax or quit the country. The world isn’t static, it is dynamic; people respond to tax rates, just as they respond to other prices. Laffer told a gathering at the Institute of Economic Affairs that this is definitely true in the UK today – and the struggling tax take revealed in the official numbers suggest that he is right. Tax rates and levels are so high as to be counterproductive: slashing capital gains tax would undoubtedly increase its yield, for example. Many self-employed workers are delaying incomes as much as possible until the new, lower top rate of tax kicks in.

Allister’s column also makes the critical point that not all taxes are created equal.
…higher VAT is also damaging growth, though it is still yielding more. Some taxes can still raise more – but try doing that with income tax, CGT or corporation tax and the result is now clearly counter-productive. These taxes are maxed out; they have been pushed beyond their ability to raise revenues.

Last but not least, he makes an essential point about the role of bad spending policy.
The problem is that spending is too high – central government current expenditure is up by 3.7 per cent year on year in April-May – not that taxes are too low. The result is that the April-May budget deficit reached £30.7bn, some £6.2bn higher than a year ago.

By the way, you won’t be surprised to learn that Paul Krugman has been whining about “spending cuts” in the United Kingdom, even though the burden of the public sector has been climbing. But given his outlandish errors about Estonia, we shouldn’t be surprised.

But that’s not the point of this post. The relevant question is why do politicians pursue bad policy and why do some economists aid and abet bad policy?

For politicians, I think the answer is easy. They simply care about getting elected and holding power. So if they think class-warfare tax policy is the way of achieving those narcissistic goals, they’ll push higher tax rates. Even if it means lower revenue, notwithstanding their usual desire to have more money so they can buy more votes.

I’m more mystified by the behavior of economists. Let’s look at a couple of examples. Justin Wolfers and Mark Thoma recently cited some survey data to claim that the Laffer Curve was universally rejected by the profession.

But as James Pethokoukis of the American Enterprise Institute explained, the survey actually showed just the opposite, with economists by a margin of nearly 5-1 agreeing that lower tax rates could boost GDP (and therefore taxable income).

Those economists did say that a reduction in tax rates, based on current levels, would not cause taxable income to jump by a large enough amount to fully offset the revenue-losing impact of the lower tax rate. But the Laffer Curve says that only happens in extreme circumstances, so there’s zero contradiction.

So why did Wolfers and Thoma create a straw man in an attempt to discredit the Laffer Curve?

I have no idea, but Republican politicians probably deserve some of the blame. Too many of them make silly claims that “all tax cuts pay for themselves,” even when talking about new credits and deductions that have no positive impact on economic performance.

To the extent that Wolfers, Thoma, and others think that’s what the Laffer Curve is all about, then their skepticism is warranted.

But if that’s the case, they should read what Art Laffer actually wrote so they can be more accurate in the future. Or they can watch these three videos.

Part I describes the theory.

Part II describes the evidence.

And Part III explains the sloppy and inaccurate revenue-estimating methodology of the Joint Committee on Taxation.

But if they think I’m too biased or that Art is similarly misguided, then they should look at some of the evidence produced by other economists.
Such as this study by economists from the University of Chicago and Federal Reserve.
Or this study by the IMF, which not only acknowledges the Laffer Curve, but even suggests that the turbo-charged version exists.
Or this European Central Bank study showing substantial Laffer-Curve effects.
Or this research from the American Enterprise Institute about the Laffer Curve for the corporate income tax.

The sooner they get up to speed on these issues, the sooner they can help give politicians good advice so that the Laffer Curve doesn’t cause more unpleasant surprises.

=================================================

Welcome Instapundit readers. Y’all may also want to read (here and here) about the Laffer Curve disrupting the plans of French politicians. Heck, even Snooki has teamed up with the Laffer Curve to deny our greedy overlords in Washington.
 
A good quote from "Basic Economics: A Common Sense Guide to the Economy by Thomas Sowell":

A government which proceeds as if the planned effect of its policies is the only effect often finds itself surprised or shocked because those subject to its policies react in ways that benefit or protect themselves, often with the side effect of causing the policies to produce very different results from what was planned.

The general idea applies to a lot more than just governments.
 
The $21 trillion dollar figure is astounding in of itself, but brings to mind one of the theories about the start of the Great Depression; the penultimate cause was the huge debt overhang that the Great Powers had accumulated in prosecuting the Great War. Certainly one of the primary factors of this economic clalamity (possibly new depression) is the debt overhang, and the realization that most people will be getting a huge "haircut" at some point in the future. The $21 trillion figure isn't even comprehensive, this is probably direct debt, and does not take into account the unfunded liabilites of government employee pensions and future expenditures like social security and CPP type pensions, as well as rising healthcare expenditures. In Canada there is a known $500 billion unfunded liability for pensions and benefits for government employees, to give you an idea of the scale of things:

http://blogs.telegraph.co.uk/news/jamesdelingpole/100171475/red-pill-blue-pill/

Red Pill, Blue Pill

By James DelingpolePoliticsLast updated: July 18th, 2012

1328 CommentsComment on this article

The other day m'learned colleague Ambrose Evans Pritchard wrote a piece in praise of money-printing. What the world needs is more Quantitative Easing, he argued, though this time deployed in "nuclear force."

I have no doubt that this would bring about a full recovery very fast if conducted with enough panache, but is it possible to marshal political consent for such revolutionary action?

The Tea Party Congress, like Europe's bourgeousie, would rather wallow in liquidation, Puritan cleansing, and mass default than tolerate the possibility of a solution.

I couldn't disagree more violently with this analysis. Nor, happily could most of you. The most popular comment response – approved by over 300 readers -  countered:

In reality, economics is not the fiscal rocket-science you make it sound. Capitalism itself is based on good old-fashioned honesty. The money at the heart of it must be both an honest store-of-value and an efficient medium of exchange. It ceases to be so when the inherent deceits of fractional reserve banking allow trillions of false credit to be pumped into the system, thus forcing up prices (booms) which inevitably lead to over-valued commodities (busts).

What happens next is that the banks, having privatised their gains in the good times, simply socialise their losses onto the tax-payer. It's a crime. Simple as that really.

Reading these words – and seeing how many "likes" they got – did my heart good. "So I'm not alone, after all," I thought to myself. "There are others out there who've taken the red pill too."

The red pill – for those who haven't seen The Matrix – is the one which shows you the world as it really is rather than cosy, fantasy confection of the popular imagination. The red pill is not for the fainthearted because it involves confronting painful, ugly reality rather than living the dream.

Let me give you an example of what taking the red pill entails. It's a report from last year by the Boston Consulting Group showing that the amount of household, corporate and government debt which needs to be eliminated stands at $21 trillion. The cost of dealing with this "debt overhang" will entail the loss (ie confiscation by the government) of one third of the wealth of the asset-owning classes. Some time in the next few months, weeks or years, we're all going to be taking a 30 per cent hair cut.

Here's another fascinating report, this time about where gold is headed. Conservatively it estimates its target price at $2,300 an ounce.

Whenever I mention such things, I'm always amused by the rage it generates in some quarters from "experts" who passionately believe that gold is overvalued, that it's a bubble that is about to burst. Well fine. If that's what you think, don't go and buy gold bullion. No one's forcing you to – and what I say makes no difference either way to the market price: you can't ramp gold like you can share prices. I just happen to think you're making a big mistake which you could easily avoid were you to acquaint yourself with the most basic principles of Austrian economics.

What you need to understand is that the value of gold is not about to go up. What's going to happen is that paper money is going to become increasingly worthless – meaning you'll need that many more worthless paper notes to buy the same amount of gold. This is what Quantitative Easing does. And the reason you're holding gold is not as some kind of crazy speculative investment which might just make you rich, rich, rich! You're doing it for the much less exciting and more depressing reason that all your savings are about to be inflated away and gold is just a way of stopping you growing any more poor.

I'm holding quite a bit of gold at the moment by way of various investments. But believe me, I'd much rather live in a world where the economy was in the kind of shape where it made more sense to buy shares instead.

Besides your response to Ambrose's piece, the other thing that has given me tremendous hope on Telegraph blogs in the last few weeks has been the arrival of the brilliant Thomas Pascoe – whom I hereby recruit, if he'll let me, as my wingman. (Hannan's probably Guy Gibson; I think I'm more like one of those suicidal Polish fighter aces.) As he showed in his piece the other day on the manipulation of the gold price, Pascoe, too has taken the red pill. He too, recognises, just how potentially dire things might get before this global economic crisis is resolved.

Quite how bad things get in the next few weeks and years really depends on how quickly the red pill faction manages to win the political and economic arguments. At the moment, the blue pill faction holds sway everywhere from Ben Bernanke's Fed to Osborne's Treasury to the entire crumbling mechanism of the EU. Given most people's reluctance to deal with reality, I wouldn't bank on a remotely happy outcome. Especially not in a world so barmy that men like Joseph Stiglitz are actually given the Nobel prize for economics…

Oh, and you can hear me talk more about this over on my podcast for Bogpaper.com. Take the red pill. T-a-a-k-e the RED PILL. It's the only way any of us are going to get out of this one alive.
 
Greece is even further downhill. This is a worrying situation since the other PIIGS have to take equally drastic action, but like Greece, may not. The idea that a 120% Debt to GDP ratio is sustainable is so far out of arc the only valid respons should be "WTF?"; the fact that Greece isn't even going to meet that figure bodes ill for everyone.

http://business.financialpost.com/2012/07/24/greeces-finances-hugely-off-track/

Greece’s finances ‘hugely off track’
Luke Baker, Reuters  Jul 24, 2012 – 12:29 PM ET

Aris Messinis/AFP/Getty Images files
Supporters of Leader of the Greek conservative party New Democracy Antonis Samaras wave flags during a pre-election speech in Athens on May 3, 2012. reece is unlikely to be able to pay what it owes and further debt restructuring is likely to be necessary, three EU officials said on Tuesday.

Comments Email Twitter BRUSSELS – Greece is unlikely to be able to pay what it owes and further debt restructuring is likely to be necessary, three EU officials said on Tuesday, a cost that would have to fall on the European Central Bank and eurozone governments.

The officials said that twice bailed-out Greece would be found to be way off track by EU and International Monetary Fund officials who have been assessing the country.

The situation just goes from bad to worse, and with it the debt ratioInspectors from the European Commission, the ECB and the IMF — together known as the troika — returned to Athens on Tuesday and will complete their debt-sustainability analysis next month, but the sources said the conclusions were already becoming clear.

It means Greece’s official-sector creditors — the ECB and eurozone governments — will have to restructure some of the estimated 200-billion euros of Greek government debt they own if Athens is to be put back on a sustainable footing.

But there is no willingness among member states or the ECB to take such dramatic action at this stage.

“Greece is hugely off track,” one of the officials told Reuters, speaking on condition of anonymity because of the sensitivity of the issue. “The debt-sustainability analysis will be pretty terrible.”

Another official pointed to the latest growth estimates from Athens, which show the economy contracting by 7% this year rather than the 5% previously forecast, meaning that the debt burden is only increasing in relation to GDP.

“Nothing has been done in Greece for the past three or four months,” said the official, referring to the delays caused by the two elections held since May.

“The situation just goes from bad to worse, and with it the debt ratio,” said the official, a policymaker directly involved in trying to find solutions to the crisis.

DIMINISHING OPTIONS

Under the terms of the second bailout agreement struck with the EU and IMF in February, Greece committed itself to further spending cuts and tax increases in exchange for a 100-billion-euro reduction in its debts.

The restructuring involved private-sector owners of Greek government bonds accepting losses of up to 70% on their holdings with the aim of reducing the debt ratio from around 160% of GDP to below 120% by 2020 — a level the IMF has deemed sustainable in the long-term.

But Greece is significantly far off reaching that 2020 goal, the officials said. One estimated that the overshoot could be up to 10 percentage points, equivalent to around 30-billion euros.

As a result, the IMF could decide to pull out of the second bailout program, having already said that further missed targets would not be acceptable. That would leave eurozone member states and the ECB to bear the cost alone.

In that case, the only way to keep Greece afloat and in the eurozone would be for the ECB and member states to write off some of the Greek debt they own or change the terms to give Athens ever more time to pay back at lower interest rates.

“This has not been explored yet politically because no one wants to launch that discussion,” the first official said. “The political feasibility of carrying out an official-sector restructuring is becoming more and more complicated.”

Even though no formal discussions have begun over so-called official-sector involvement, two possibilities have been mentioned — the ECB taking a writedown on the estimated 40-billion euros of Greek bonds it holds, or member states improving the terms on their loans to Athens.

But the officials Reuters spoke to listed six member states who are firmly opposed to extending Greece further lifelines, not only because of Athens’s persistent missing of targets but because the costs will soon be born directly by taxpyaers.

“The political dynamics are really going against the economic dynamics,” one source said. “The economic arguments may be clear — we need to restructure Greece’s debt if it is to be sustainable — but politically there’s no willingness.”

That returns the debate to whether Greece, after 2-1/2 years of crisis and two attempts to overhaul its economy with multi-billion-euro rescues, will stay in the eurozone in the long term.

© Thomson Reuters 2012
 
When you are looking at a bunch of numbers spread across a broad range it is a common strategy to chuck out the high and the low numbers, declare them to be outliers and then refigure the analysis based on what is left.

In the EU/Euro situation the comparable strategy would be to throw Greece AND Germany out of the club and try to come up with a useful solution amongst those that are left.
 
Economically or Politically?

Politically I get it. Germany has a couple of millenia of history as "The Other" - speaking Theutiscam instead of Romansch, and often a stronger attachment to  Orthodox Constantinople than Trinitarian Rome.  The EU is all about binding Germany to France. 

But Germany is demonstrating yet again, just as Greece is, that it is different to France.  And all those other little micro-cultures scattered around those European valleys are equally different.

No amount of vapid politicians havering on about "all mankind are brothers yet, for all that" will change that essential European reality.
On the economic front though things are different. 

Just after I wrote that comment yesterday I saw this article in the Telegraph by about 17 pro-Euro German economists declaring the Euro broken and offering a 20 year investment tool to fix it.

Investments need investors.  Germany would be better outside as an investor than inside as a "penitent".  Greece, on the outside, would change the dynamic, potentially making the burden of the other penitents less.  Greece could then be treated as the small special case that it is. 

France - outside the instrument, which it needs, it could assuage its pride as being one of the Great and the Good, just like Germany and Britain and the US and Japan and China.

France - inside the instrument, could assuage its pride as being one of the Great and the Good leading the benighted to the promised land of European Unity.

I generally consider the Germans to be too pragmatic to let pride get in the way of a good deal these days.


Edited to add link.
 
The economic statistics look poor all over. Regardless of how well our government and economy do, the fact that we are "missing" 33 million potential customers in the US alone (U3 unemployment number) tends to hold us back, and as this article points out, big drops are very likely in the EUzone and China. India, while not mentioned here, is also slowing considerably as inefficiency and corruption strangle growth. Previous experiences with debt driven depressions suggest that we may be in for up to a decade of slow growth as things get deleveraged.

http://business.financialpost.com/2012/08/23/economic-rot-spreads-from-beijing-to-berlin/

Economic rot spreads from Beijing to Berlin
Steven C. Johnson and Jonathan Cable, Reuters | Aug 23, 2012 7:17 AM ET | Last Updated: Aug 23, 2012 9:38 AM ET
More from Reuters


ReutersBusiness surveys released on Thursday painted a global picture of economic malaise from Beijing to Berlin.

Jack Mintz: While many experts criticize the Europeans for not pulling together politically, U.S. indebtedness is far greater and more dangerous to the world economy
The indicators taken as a whole indicate a material slowdown in the pace of the world economy

NEW YORK/LONDON — World business surveys on Thursday painted a picture of economic malaise stretching from Beijing to Berlin, adding to concerns that the world economy was slowing down.

The 17-country eurozone appeared headed for its second recession in three years. Financial data firm Markit said its Purchasing Managers’ Index suggested the eurozone economy would shrink about 0.5% in the current July-to-September quarter.

Europe’s problems created headaches in other economies as well, particularly China’s, which counts Europe as its single biggest export market. The HSBC Flash China manufacturing PMI fell to 47.8 in August, its lowest level since November.

Related
Jack Mintz: Why U.S. is worse than Europe

The latest sign of trouble in China: The bursting jade bubble

The CEO of one of the world's biggest bellwethers says the global outlook has never been so uncertain


By contrast U.S. manufacturing activity improved slightly this month, though new export orders declined for a third straight month because of reduced demand in Europe, while the pace of hiring slowed for the fifth month in a row.

A separate report showed the number of Americans applying for first-time jobless benefits rose unexpectedly last week. (Interpolation: How is it that three straight years of economic contraction and job losses and it is still "unexpectedly")

“The indicators taken as a whole indicate a material slowdown in the pace of the world economy,” said economist Philip Shaw at Investec.

Whether that will be enough to provoke more action from central banks remained unclear, though. The European Central Bank is expected to cut interest rates next week, but analysts do not expect additional steps to stimulate lending.

And while minutes from the last U.S. Federal Reserve meeting suggested another round of stimulus could come “fairly soon,” subsequent signs of improvement in the labour and housing markets may keep the central bank on the sidelines for a while longer.

St. Louis Fed President James Bullard on Thursday said the pace of U.S. growth would have to worsen more significantly before the Fed acted. “Going along at this slow pace is not enough to justify gigantic action,” he said.

Tim Ghriskey, chief investment officer at Solaris Asset Management, said Thursday’s U.S. manufacturing data was “in line with the sort of recent economic data we have seen, which saw slight but improving economic conditions.”

© Thomson Reuters 2012
 
Consumer product giant Unilever sees the future, and begins to roll out third world marketing strategies for Europe. The erosion of wealth and consumer purchasing power isn't confined to Europe; watch to see if this sort of marketing rolls out in North America as well:

http://www.telegraph.co.uk/finance/financialcrisis/9501771/Unilever-sees-return-to-poverty-in-Europe.html

Unilever sees 'return to poverty' in Europe

Unilever will adopt marketing strategies used in developing countries in order to drive future growth in Europe, as the head of its European business warned that poverty will rise in the region as a result of the debt crisis.

By Szu Ping Chan2:25PM BST 27 Aug 201272 Comments

The company behind Persil, PG Tips and Flora said it will apply lessons from its Asian business as consumers change their shopping habits amid a financial crisis that has left Greece mired in recession for the past five years and Spain with the highest unemployment rate in the industrialised world.
"Poverty is returning to Europe," Jan Zijderveld, the head of Unilever's European business told the Financial Times Deutschland in an interview.
"If a consumer in Spain only spends €17 when they go shopping, then I'm not going to be able to sell them washing powder for half of their budget."
Unilever has already started to change the way it sells some of its products. In Spain, the company sells Surf detergent in packages for as few as five washes, while in Greece, it now offers mashed potatoes and mayonnaise in small packages, and has created a low-cost brand for basic goods such as tea and olive oil.

"In Indonesia, we sell individual packs of shampoo 2 to 3 cents and still make decent money," said Mr Zijderveld. "We know how to do that, but in Europe we have forgotten in the years before the crisis."

Unilever said last month that "continued sluggish economies and fragile consumer confidence had hampered growth" in developed markets. European revenues grew by just 0.2pc in the second quarter, compared with growth of 16pc in Asia and other emerging economies, the company said.
Mr Zijderveld also said that in order to drive growth, better products would need to be matched by better in-store service. Using the example of Apple, he said: "In an Apple store, everyone thinks: Wow, what an experience."

"But in some supermarkets in Europe, you think: half empty shelves, boxes on the floor, not a sales person in sight - how terrible is that?"
"Why can't we sell food like Apple sells devices? Why are there no genius consultants for chicken?"
 
How many supermarkets are there in Indonesia versus Bazaar sales?

What is the profit margin on Ipads versus Surf detergent and Mashed Potatoes?

What Unilever is doing is going back to Europe of the 1950s.  People re-evaluating the definition of luxuries and necessities.  People shopping with cash in hand at the local corner shop because they can't afford to put gas in the car and you can't carry much home on the bus.

Meanwhile, those that can afford to shop in an Apple store are blissfully unaware of their countrymen's trials as evidenced by this poor Spaniard winging about having to get by on 5100 Euros a month when 25% of his constituents are receiving 400 Euros a month as total income when on unemployment.

Keep this up much longer and more countries will be experiencing their Marie Antoinette moment.

PS Comparative Analysis of Britain and Italy  - probably related to Britain exporting more outside the EU than inside the EU.





 
This article, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail suggests that we are headed towards an (unnecessary) divide:

http://www.theglobeandmail.com/news/world/blocs-within-blocs-undermining-apec/article4528865/
‘Blocs within blocs’ undermining APEC

MARK MACKINNON
VLADIVOSTOK — The Globe and Mail

Published Friday, Sep. 07 2012

When the Asia-Pacific Economic Cooperation summit wraps up this weekend, the 23 leaders assembled in this Russian port city will gather for their traditional “family photo” and then issue communiqués emphasizing the need for co-operation across a region that accounts for 44 per cent of all trade.

With Europe in crisis and the global economy badly in need of good news, APEC should never be more important than it is now. But behind the scenes, this grouping of the region’s economies – conceived in 1989 as a way of promoting trade while shelving political differences – is facing an existential crisis.

The threat to the grouping’s relevancy comes in the very sort of politics that APEC was designed to avoid. The United States, frustrated with a Chinese leadership that has benefitted from membership in international trade organizations while refusing to fully open its own markets or allow its currency to float, is working to gather the economies it considers friendly in a proposed free-trade area dubbed the Trans-Pacific Partnership.

Canada, should it be willing to open its poultry and dairy markets to increased competition, is on track to join that club, as is Mexico. Australia, New Zealand, Chile, Peru, Brunei, Singapore, Malaysia and Vietnam are already full partners in the TPP talks, and Japan is being actively courted. China, meanwhile, feels it has intentionally been snubbed.

“China’s exclusion is strange given its huge economic presence in Asia-Pacific. This has given rise to views that the U.S. is driving the TPP with the strategic objective of marginalizing China,” read an opinion piece printed in the official China Daily newspaper ahead of the APEC summit in Vladivostok.

Prime Minister Stephen Harper’s government says it sees a role for both the TPP and for APEC. But it clearly envisions the former as an active free-trade area, and the latter as a mere talking shop for dealing with regional issues.

“These [TPP partners] are all countries that have made clear commitments to fighting protectionism and to enhancing trade by the removal of tariff and non-tariff trade barriers,” Trade Minister Ed Fast said in an interview with The Globe and Mail in Vladivostok ahead of Mr. Harper’s arrival here Friday. Mr. Fast said that while “the TPP is not an exclusive group,” it was intended to “bring like-minded countries within the Asia-Pacific region together.”

APEC was never about which countries were and weren’t “like-minded,” a term more often used to describe members of the NATO alliance. So on Thursday – and after initially promising they wouldn’t use the Vladivostok summit as an opportunity to develop their separate trade grouping – Mr. Fast and the other TPP participants met on the sidelines of APEC to talk about the next round of TPP negotiations. They’ll meet again next week in Leesburg, Va.

Undeterred, Beijing is working to build a rival free-trade area of its own, with formal negotiations on a tripartite free-trade pact with Japan and South Korea set to begin by the end of the year. In the spirit of APEC, any deal would bring together the three main economies of East Asia, while leaving aside the mounting political disagreements – including thorny territorial disputes – between Beijing, Tokyo and Seoul.

Which way Japan, the world’s third-largest economy after the U.S. and China, tilts is seen as crucial to the success of the TPP. Tokyo clearly views this as an either-or decision, and has given strong indications that it sees the tripartite regional deal as more advantageous (and less difficult to join) than the TPP, which would require opening its own highly protected agricultural markets.

Meanwhile, an APEC-wide free trade area – which leaders have spoken loftily about at summit after summit – is an ever-distant bell. Success within APEC is measured in incremental progress, such as the minor agreement trade ministers reached on Friday that will see tariffs capped at 5 per cent for a list of 54 environmentally friendly goods. (Canada has already met the new tariff goal on 51 of the items.)

Host Russia, which has only just turned its attention to APEC after decades of focusing on its European neighbours, is clearly concerned that APEC is on the verge of being marginalized as the region dissolves into competing blocs. “The position of the Kremlin is we only need APEC. We don’t need the development of these blocs within blocs. We learned this lesson during the Cold War,” said Andrey Gubin, associate professor of international relations at the Far East Federal University, the school that will inherit the campus on Vladivostok’s Russky Island that is currently hosting the APEC summit.

Thai Prime Minister Yingluck Shinawatra is another leader expected to plead with her colleagues to focus their trade-promotion efforts through APEC. But Thailand is itself a member of the 10-member Association of Southeast Asian Nations, which is pushing towards the creation of yet another trading bloc, known as ASEAN+6, which would include neighbours China, India, Japan, South Korea, Australia and New Zealand. Born partly out frustration with the exclusiveness of the TPP invitations, ASEAN+6 would immediately become the world’s largest free-trade area if it comes to fruition.

Of course, some of these emerging blocs have overlapping membership – particularly if Japan and South Korea can be lured into the TPP – arguably creating a framework for the region-wide pact APEC always talks about but never approaches.

But the lesson the “like-minded” TPP governments have learned is that it is impossible in the long run to completely separate trade from the rest of international relations. Free trade requires trust, and that’s absent in the wider APEC forum right now.

Despite APEC’s trade-focused mandate, politics look set to take over much of the Vladivostok meeting. U.S. Secretary of State Hillary Clinton – standing in for the campaigning President Barack Obama – has been trading veiled barbs with the Chinese leadership all week as she toured the region before arriving in Vladivostok. Washington has criticized Beijing’s claim to the entire South China Sea, while China clearly feels threatened by the U.S. military’s declared “pivot” towards Asia. Nor will Ms. Clinton miss the opportunity at APEC to again pressure Russian President Vladimir Putin and Chinese President Hu Jintao over the deepening quagmire in Syria.

With an election in his near future, and nationalist passions rising over island disputes with China and South Korea, Japan’s Prime Minister Yoshihiko Noda – the most sought-after man at the summit – will likely back away from both the TPP and the tripartite trade pact for the time being.

APEC leaders will be left to sign the deal capping environmental tariffs. They’ll issue the usual statements about the need for greater co-operation across the region, especially with the global economy facing badly uncertain times.

And then the leaders will leave Vladivostok, and the real trade talks will begin elsewhere.


So, the Americans, in pursuit of very short term advantages, may have given the Chinese the "key to Japan."

Europe is, now, in the process of redefining its economic and political superstructures.

Russia is in inexorable decline.

Latin America, led by Brazil, had failed to "bloom."

Africa remains ... well Africa.

Ditto the Middle East and West Asia.

The Americans, and others, should move ahead with the TPP, despite the fact that Japan and South Korea may enter into a tripartite free trade agreement with China, but the long term goal for Australia, Canada, Malaysia and the other TPP members must be to unite the TPP and the China-Japan-South Korea free trade area, assuming that both come to fruition.

The American decision to try to marginalize China is a serious strategic blunder. A sound grand strategy requires China to be "inside the tent pissing out, [rather] than outside the tent pissing in," as the late President Lyndon Johnson put it. But, what's done is done and we, the American led West, have to live with America's (flawed) choices.

The good news, such as it is, is that China has decided to intervene, albeit slightly, in Europe's financial crisis.

Our, Canadian, imperative - which we share with e.g. Australia, Mexico, Norway and South Africa, is to bring Asia, especially China and India, fully into the global free trade system. Our "enemy," in the immediate term, is, distressingly, the USA - no matter who is president. The fact, and it is a fact, that the global free trade system is none of global, free or a system is of less importance than that some countries, including Australia, Canada New Zealand and Singapore, want one and are willing to compromise to get one.
 
"China’s exclusion is strange given its huge economic presence in Asia-Pacific."

IOW, might makes right.  China's protectionist policies should be no-one else's concern and China should have a seat - probably a distinguished seat - at any table.

My counter-proposal is to let smaller organizations of highly protectionist nations negotiate whatever "free" trade they can manage among themselves after they exclude all their sacred cows while we join larger, more nearly "free" trade blocs and prosper.  They will gradually become relatively weaker, and there won't be any question of mustering the strength to sustain a stream of piss when they finally come knocking at the tent door.
 
Argentina seems to be the poster child for what not to do. Kirkhill had noted in another thread that modern communications and financial products like PayPal provide a way to bypass the gatekeepers. Well Argentina is now attempting to divest savers from their wealth by blocking PayPal for domestic transactions:

http://news.slashdot.org/story/12/09/18/0135227/paypal-users-in-argentina-can-no-longer-make-domestic-transactions

"The online payment service said that from 9 October: 'Argentina resident Paypal-users may only send and receive international payments.' Last year the Argentine government announced restrictions on the purchase of U.S. dollars. It has led to an increase in currency sales on the black market — but Paypal's exchange rates are better. Locals were setting up two accounts under different email addresses and transferring money between the two, exchanging local currency pesos for dollars in the process."
 
Respected prognosticator Nouriel Roubini gives his take on the state of the global economy in this piece which is reproduced under the Fair Dealing provisions of the Copyright Act from Project Syndicate:

http://www.project-syndicate.org/commentary/fiddling-at-the-fire-by-nouriel-roubini
Fiddling at the Fire

Sep 13, 2012

PARIS – Financial markets have rallied since July on the hope that the global economic and geopolitical outlook will not worsen, or, if it does, that central banks stand ready to backstop economies and markets with additional rounds of liquidity provision and quantitative easing. So, not only has good – or better-than-expected – economic news boosted the markets, but even bad news has been good news, because it increases the probability that central-banking firefighters like US Federal Reserve Chairman Ben Bernanke and European Central Bank President Mario Draghi will douse the markets with buckets of cash.

But markets that rise on both good and bad news are not stable markets. “Risk-off” episodes, in which investor sentiment sours, are likely to return if economic news worsens and confidence in policymakers’ effectiveness drops.

In the eurozone, euphoria followed the ECB’s decision to provide support with potentially unlimited purchases of distressed countries’ bonds. But the move is not a game changer; it only buys time for policymakers to implement the tough measures needed to resolve the crisis. And the policy challenges are daunting: the eurozone’s recession is deepening as front-loaded fiscal consolidation and severe credit rationing continues. And, as eurozone banks and public-debt markets become increasingly balkanized, establishing a banking union, a fiscal union, and an economic union while pursuing macroeconomic policies that restore growth, external balance, and competitiveness will be extremely difficult.

Even the ECB’s support is not obvious. Monetary hawks – the Bundesbank and several other core central banks – who were worried about a new open-ended ECB mandate pushed successfully for strict and effective conditionality for countries benefiting from the bond purchases. As a result, they can pull the plug on the program if its stringent criteria are not met.

Moreover, Greece could exit the eurozone in 2013, before Spain and Italy are successfully ring-fenced; Spain – like Greece – is spiraling into depression, and may need a full-scale bailout by the “troika” (the ECB, the European Commission, and the International Monetary Fund). Meanwhile, austerity fatigue in the eurozone periphery is increasingly clashing with bailout fatigue in the core.

Small wonder, then, that Germany, politically unable to vote on more bailout resources, has outsourced that job to the ECB, the only institution that can bypass democratically elected parliaments. But, again, liquidity provision alone – without policies to restore growth soon – would merely delay, not prevent, the breakup of the monetary union, ultimately taking down the economic/trade union and leading to the destruction of the single market.

In the United States, the latest economic data – including a weak labor market – confirm that growth is anemic, with output in the second half of 2012 unlikely to be significantly stronger than the 1.6% annual gain recorded in January-June. And, given America’s political polarization and policy gridlock, we can expect more fights on the budget and the debt ceiling, another rating downgrade, and no agreement on a path toward medium-term fiscal consolidation and sustainability – regardless of whether President Barack Obama is reelected in November. On the contrary, we should expect agreement only on the path of least political resistance: avoidance of tough fiscal choices until the bond vigilantes eventually wake up, spike long rates, and force fiscal adjustment on the political system.

In China, a hard economic landing looks increasingly likely as the investment bubble deflates and net exports shrink. Meanwhile, the reforms necessary to reduce savings and increase private consumption are being delayed. As in Europe and the US, the worst will be avoided in 2012 only by kicking the can down the road with more monetary, fiscal, and credit stimulus.

But a hard landing becomes more likely in 2013, as the stimulus fades, non-performing loans rise, the investment bust accelerates, and the problem of rolling over the debts of provincial governments and their special investment vehicles can no longer be papered over. And, given a new leadership’s caution as it establishes its power, reforms will occur at a snail’s pace, making social and political unrest more likely.

Meanwhile, Brazil, India, Russia, and other emerging economies are playing the same game. Many have not adjusted as advanced economies’ weakness reduces the room for export-led growth; and many delayed structural reforms needed to boost private-sector development and productivity growth, while embracing a model of state capitalism that will soon reveal its limits. So the recent slowdown of growth in emerging markets is not just cyclical, owing to weak growth or outright recession in advanced economies; it is also structural.

Similar dithering is apparent at the geopolitical level as well. The major global powers are still trying negotiations and sanctions to induce Iran to abandon its efforts to develop nuclear weapons. But Iran is playing for time and hoping to reach a zone of immunity. By 2013, an Israel that – rightly or wrongly – perceives Iran’s nuclear program to be an existential threat, and/or the US, which has rejected containment of a nuclear Iran, may decide to strike, leading to a war and a massive spike in oil prices.

Ineffective governments with weak leadership are at the root of the problem. In democracies, repeated elections lead to short-term policy choices. In autocracies like China and Russia, leaders resist the radical reforms that would reduce the power of entrenched lobbies and interests, thereby fueling social unrest as resentment against corruption and rent-seeking boils over into protest.

But, as everyone kicks the can down the road, the can is getting heavier and, in the major emerging markets and advanced economies alike, is approaching a brick wall. Policymakers can either crash into that wall, or they can show the leadership and vision needed to dismantle it safely.


The Great Recession just will not evolve into a broadly based, energetic recovery.
 
I do agree with this statement in the article "Ineffective governments with weak leadership are at the root of the problem", I'm not a big fan of what I just read.  A lot of lingo was used instead of factual information.  As in "Monetary hawks, bailout resources, game changer"  I felt it was just more a play of words for publicity rather than providing a informative overview.

I haven't keep up much on the Eurozone problems.  I do feel it is relevant to toss a few things out there as food for thought regarding the global problems.  I will quote Ben Bernanke.  He did a interview a couple years back regarding the problems in the united states, but these also apply to the world too.

#1 problem was technology.  While good for our health, it is bad for jobs.  I am quoting Mr. Bernanke, (my percentages and wording could be off a little as this is from memory) albeit the principles involved are the same.  'In the 1960's 50% percent of the American workforce is in agriculture.  Today only 3% of the American workforce is in agriculture.  This is due to technology and and better machinery.  The problem we had to face was shifting 47% of the workforce and retraining them and providing new fields for them to go into'

47% of the American workforce equals 10's of million of jobs.

Mr. Bernanke also went on to say 'The problem is not captial.  Banks and Corporations have more than enough capital.  The problem is business have no where to invest the capital in order to create jobs'

Some food for thought.
 
>The Great Recession just will not evolve into a broadly based, energetic recovery.

We can't move past the necessary corrections/adjustments as long as politicians energetically resist the corrections/adjustments.  The fundamental problem they will not confront and solve is the desire to spend all of today's and some of tomorrow's revenues - every day.
 
Brad Sallows said:
>The Great Recession just will not evolve into a broadly based, energetic recovery.

We can't move past the necessary corrections/adjustments as long as politicians energetically resist the corrections/adjustments.  The fundamental problem they will not confront and solve is the desire to spend all of today's and some of tomorrow's revenues - every day.


I agree with you, Brad: spending, all spending, including all sacred cows, must be cut. Where I suspect we part company is on the revenue issue. I don't think spending cuts of sufficient depth are wise, much less politically possible; therefore I think revenue must be enhanced, also. The easiest, but least desirable way to raise more revenue is to raise individual (income) taxes; a much better, but also, I suspect, politically impossible way is to impose a national/federal value added tax, à la our HST, on top of state and local sales taxes. That leaves reforms of the HUGE and HUGELY complex US tax code. My guess is that enough revenue can be found within a few sane, harmless (except to tax lawyers and accountants) tax code reforms to make the spending cuts equally harmless, albeit still painful to many voters.

My other guess is that 99.9% of elected US legislators, Democrats, Independents, Republicans of all stripes, equally, are too frightened or too indebted to the lobby industry to do what good economic sense and simple patriotism require; they will neither cut nor reform until a wholly preventable disaster strikes.

Americans, again of all political stripes, are the authors of their own misfortunes but the world will pay for their willful irresponsibility.
 
The subsidy game that congress has allowed over the past decades is probably one of the biggest contributors to the huge deficit.....A real hard knocks management and elimination of most would help immensely
 
GAP said:
The subsidy game that congress has allowed over the past decades is probably one of the biggest contributors to the huge deficit.....A real hard knocks management and elimination of most would help immensely


The problem with industrial subsidies is that, despite international trade rules, everybody does it. The net effect is that a unilateral cut in subsidies will harm the country making the cuts without any immediate or near term offsetting benefits. Trade negotiations are, largely, exercises in me attacking your subsidies while I, resolutely, defend my own. The US has been stunningly successful at making national security exempt from international trade scrutiny and then using the defence budget as a HUGE industrial subsidy programme, but, in so doing, they have opened the same door to the rest of the world.

Don't get me wrong: I detest subsidies and I believe that many important traders, like Australia and Canada, could and should cut tariffs and subsidies unilaterally - accepting some (considerable) "short term pain" for, the historical record suggests, even more considerable "long term gain." But that, too, is politically impossible or, at least, highly improbable.
 
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