News & Analysis
Is There a Recovery Underway ... Or is that a Hammer You're Holding?
Global slump risk falls as world money rebounds ... The first green shoots have begun to emerge in money supply data from across the world, raising hopes of a tentative global recovery by later this year ... Data collected by Simon Ward at Henderson Global Investors show that a key gauge of global money – six-month real M1 – has picked up at last after a drastic slowdown over the early spring. The combined growth rate for the G7 economies and E7 emerging powers levelled out at 1.6pc in May and rebounded at 2.5pc in June, though China and India are still contracting. The M1 data measure cash and overnight deposits and are a leading indicator of industrial output six months ahead. They give some comfort that the latest growth scare will stop short of outright slump, the point where "feedback loops" set off a self-feeding downward slide. – UK Telegraph
Dominant Social Theme: "Sun will come out tomorrow! ..."
Free-Market Analysis: Having sung the praises of Ambrose Evans-Pritchard for so long, we now seem destined to plumb aspects of his economic analysis that we find questionable. Or so we've been doing lately.
Evans-Pritchard's best moments, in our view, came post-2008, when he came into his own almost alone among mainstream journos in predicting the bad things that have now happened to the euro and EU.
But recently Evans-Pritchard has mislaid the narrative. As he himself has admitted, he is likely to be far more attractive to free-market types when criticizing the over-reaching of central banks and policy makers, specifically the ECB and Bank of England.
Today, there is nothing left to criticize. Europe is in ruins and Britain is not far behind. Thus, Evans-Pritchard has reversed his philosophical course.
These days, instead of railing against monopoly paper money printing and predicting via an array of enviable sources just how counterproductive this or that monetary manipulation would prove, Evans-Pritchard has gone over to the proverbial dark side.
We still remember when it occurred. Months ago, he wrote this strange article out of nowhere about how Spain would weather the debt crisis better than other PIGS countries because it had a high tech work force and products and services in demand throughout the world.
We were surprised that after writing brilliant articles on the EU crisis he could come up with what we considered a spectacularly wrong-headed prediction.
The problem with Spain, as with other PIGS countries, is that that the problems are monetary, not industrial. This is a common mistake made by the chattering classes but rarely by such acute minds as that possessed by Evans-Pritchard, who had focused his million-plus readership on oftentimes glorious monetary analysis.
Unfortunately, it was only a sign of things to come. Soon his apostasy was so evident that even other columnists at the Telegraph were taking him to task. Columnist James Delingpole, in a post entitled "Red Pill, Blue Pill," wrote:
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 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.
While this is perhaps a bit simplistic, the sentiment, in our humble view, is fairly accurate. One cannot cure a monetary crisis with more of the same.
If one is hitting oneself over the head with a hammer, hitting harder will not cause a cessation of pain.
This latest article by Evans-Pritchard, then, is another example of how horridly wrong one can go when applying Keynesian monetary analysis to real-life economic situations.
John Maynard Keynes was, in fact, the prototypical linear thinker. As we've pointed out previously, he never bothered apparently to define in detail how recessions and depressions came about. He was only interested in ways to cure them.
His fixation on the cure was probably because that's what his brief was. It seems clear to us that Keynes was basically hired on by the power elite of the day to promote a General Theory that would include a healthy dose of government interference.
Why did Keynes travel down this path? Well, he knew where his proverbial bread was buttered. Sad to say, journos like Evans-Pritchard do, too. Here's some more from the article:
Mr Ward said global industrial output should start to "bottom out" by October. The rebound is a huge relief to monetarists following the sudden collapse of M1 growth from a peak of 5.1pc last November, a rare pace of decline with echoes of early 2008.
The weak data over the winter proved to be an early warning for the sharp global downturn seen in the second quarter, with the eurozone back in recession, the US at stall speed, and China flirting with a hard landing.
"The loss of momentum has been startling, and that can take on a life of its own," said Mike Lenhoff from Brewin Dolphin. "Central banks are pulling out all the stops and acting together, and that's powerful stuff. This is what markets are reacting to."
Tim Congdon, from International Monetary Research, who tracks "broad" M3 money, said the industrial world may be turning the corner. "Early 2013 should see a much better macro-economic outcome with better growth and lower inflation at the same time – so long as the euro doesn't blow apart." ...
Any world recovery is likely to be very fragile as the US and Europe battle the headwinds of debt deleveraging, and China struggles to manage the fall-out from its last credit blitz. There is no margin for policy error anywhere. Yet the bulls have a nice puff of wind in their sails for now. Enjoy it.
Oh, come on! This analysis is so much puffery. Evans-Pritchard knows full well that the current business cycle likely does NOT provide for a sudden recovery.
How do we know that? We know because far too much money has been printed and is sitting in bank coffers. There is no way so much money can be "sterilized." Once a REAL uptick begins, the velocity of money will pick up, causing price inflation and resultant interest rate hikes.
This is just what happened in the 1970s. A brief respite gave way to a tremendous rate-induced slump courtesy of then Fed Chairman Paul Volcker. Volcker pushed rates nearly to 20 percent, causing a full-scale economic meltdown while squeezing out the larger economy's mal-investments. Only then did the stock market take off.
But how high will interest rates have to go today? This is why we've predicted there will more likely be a worldwide crisis leading potentially to an elite manipulated world currency than there will be a near-term recovery.
We do believe that Evans-Pritchard understands this, for he is old enough to recall the 1970s. But he is serving more than one master now and so must give voice to this sort of thing.
Conclusion: We'd welcome the "old" Evans-Pritchard back...