The Next Nail

This is not the first nail, this is not the second nail; this is merely the next nail that is set upon the top of a coffin. We can argue that this was the last nail that was produced in Scunthorpe as Tata Steel sheds one in six jobs in the UK. This is only the beginning of an onset that many, including me had predicted this in some form. Yes, it is only in some form, because there were too many parameters that could fit the situation and as the levels change the combination resulted in different elements to shut down. Yet, this is not about steel, not about those steelworkers, or about Tata Steel. It is merely a facet in all this. Consider the two articles. The first ‘The Eurozone needs a strong French economy‘ from October 8th (at http://www.theguardian.com/business/2015/oct/08/the-eurozone-needs-a-strong-french-economy), the second ‘Italy budget: Renzi risks Brussels battle‘ (at http://www.theguardian.com/business/2015/oct/15/italy-budget-renzi-risks-brussels-battle) and the third ‘ECB meeting to be closely watched for stimulus talk‘ (at http://www.theguardian.com/business/2015/oct/18/ecb-meeting-to-be-closely-watched-for-stimulus-talk-qe) from October 18th. The articles are not related, but they show the continued path people should have been warned against. People should have been warned because those in charge are spending the little leeway they had to leave a mess for many others to clean up. Let’s take a look at my reasoning, because if that is at fault, than so are the conclusions.

You see, new rounds of stimulus are set to ward of deflation as it is hinted at in the third article. So basically, Europe will print more money this money is spend on all kinds of things, this in time when the treasury coffers of nearly EVERY European nation cannot afford it. Let’s take a little step back in time. Let’s take a look at Germany 1920’s, at this time inflation was growing at an alarming rate, but the government simply printed more and more banknotes to pay the bills. So, bills were printed to fight inflation perhaps? I actually remember holding one of those banknotes, for 15 seconds I felt rich, then I realised no one would touch that money, which is pretty much the feeling the people in those days had. The actions behind this were the Treaty of Versailles and the 1921 London Schedule of Payments. We can ‘paraphrase’ that into ‘debts’. So as we now see that governments have debts and that more and more money is printed, is the difference not merely cosmetic at best?

The next part is shown in the second article. The subtitle gives us the power part. ‘Italian prime minister unveils business-friendly tax cuts and rise in spending despite EU warning plans may breach austerity rules‘, another government that has decided to change the rules as it befits them. Prime Minister Matteo Renzi is showing Italy and others a budget that they cannot afford. The line “Renzi said €5bn (£3.7bn) of tax cuts would include the abolition of a wealth tax on the main residence of all Italians, worth around €200 a year to most homeowners” gives us the first worry. Even though at 73% home ownership seems high, but is that the same in places like Venice, Milano, Rome and the larger cities? Or will that show that the 25% not owned by the tenant is still owned by someone, which would be giving massive benefits to the ‘Amici di Silvio Berlusconi‘ perhaps?

The next quote is “This year not only are the taxes not going up but they are coming down”, which sounds great to the people of Italy and they are welcome to it, yet the reality is not that great. In 2010 the debt was 2.4 trillion, or well over 110% of GDP. In 2013 it had risen to 130% of GDP, and even though the debt seemed to go down, these short sighted actions would show soon enough that Italian debt will increase, what happens then? Consider that the debt has grown to the effect that the due interest is almost 2,500€ per second. Yes, per second! So, in which universe is stopping reducing the debt a good idea? According to some sources, the wealthy of Italy has moved almost 200 billion away from the Italian shores. So that part will not get taxed any day soon. Another quote that matters is “Alessandro Zattoni, an economics professor at the LUISS business school in Rome, said the EU commission is concerned that the deterioration in world trade following the slowdown in China could hurt the Italian economy, hitting tax revenues and further widening the budget deficit“, I cannot deny that this is a factor, yet what other shores could Italy approach? It seems that the UK, the bulk of the EEC and a few others are considering China to be the economic oil of salvation. Yet, how realistic is that? My issue comes from the last part. “The Eurozone’s return to negative inflation is driven by cheaper energy costs, which fell 8.9% year-on-year following the tumble in oil prices“, well is ‘negative inflation’ not deflation? Seems a little ‘wankish’ to hide behind a double negative, doesn’t it? And how about the other part, ‘driven by cheaper energy cost’, in my view, cheaper energy means that  the people keep a little more in their pockets, it could be used for lowering their debt or even buying consumer items. Perhaps that money is needed to pay for the 1.4% increase for food. So many options, yet if governments are depending on the revenue from their energy systems, what other mistakes are they making? Profit from energy to corporations? Could be, but how much revenue would that be?

So as we see this news, when we hear that the ‘Risk of global financial crash has increased, warns IMF‘, which gives us the first paragraph “The risk of a global financial crash has increased because a slowdown in China and decline in world trade are undermining the stability of highly indebted emerging economies, according to the International Monetary Fund (IMF)“, which is what I proclaimed for a long time. I never proclaimed that China’s economy would slowdown. This is because I had no decent numbers to compare this against, yet the need for manufacturing was a known and in that Europe has been in decline for some time. In addition, CNN reported ‘More cracks are showing up in America’s economy‘, with the quote “The Fed worries about negative inflation, which is associated with weak economic conditions and a symptom that prices and perhaps wages could be falling“, which is the second entity that seems to be ‘debutanting’ towards governments by avoiding the ‘deflation’ word. Which gets us to the quote “The September jobs report on October 2 was nothing short of disappointing. The U.S. added only 142,000 jobs in September. It stood in sharp contrast to the previous 12 months when the U.S. economy added an average of 256,000 jobs per month. Wages haven’t grown either. Job gains in July and August were also revised down“. This is the start of the issues that will also hit Europe. We will not notice this immediately as the US has to deal with Thanksgiving, Halloween and Christmas. This gives us a slightly better ‘time’ according to the economists, yet as Italy makes their changing and as the people in Europe will get more stimulus, the overall balance becomes less and less. This gets us to the final quote by CNN “As the global economy worsens, it appears the U.S. economy might not have the strength to prop up its peers. Instead, it might be getting dragged down by them“, which seems to be a mere exercise in simplicity when we look at cause and effect of the situation.

So how does France fit into all of this? Well, with Germany down and Italy taking a dive only the UK and France remain to keep the mess afloat, the two nations that are now in the process of dealing with an exit from all of this forced through its population. There is no guarantee it will be solved, there is absolutely no guarantee that either will remain within the Euro even within the EEC is a stretch at this time. All because proper financial legislation and better budgeting was something none of these governments seemed to have taken on, now there are little to no options left.

The quote “Whenever someone proposes turning the Eurozone into a transfer union, as France’s economy minister, Emmanuel Macron, recently did, the presumption is that Germany will carry everyone else on its shoulders. But why should only Germany have that responsibility? France’s economy is roughly three-quarters the size of Germany’s” is adamant here. France has the export article the entire world needs, and loves (fermented grape juice). Beyond that the bigger items (Cheese) has its own survivability, yet is that enough? Well, that is the question, more important none of these articles make the top 5 of export for France.

  • Machines, engines, pumps: US$66.3 billion (11.7% of total exports)
  • Aircraft, spacecraft: $57.7 billion (10.2%)
  • Vehicles: $47.6 billion (8.4%)
  • Electronic equipment: $44 billion (7.8%)
  • Pharmaceuticals: $35.2 billion (6.2%)

So Even as we get the following part “Progressive economists love the French government for spending a staggering 57% of GDP, compared with government expenditure of 44% of GDP for Germany“, yet there is also a problem, as far as I was able to find (apart from the presentation at the end of this blog), France, like several nations are setting their budgets against GDP, yet when the GDP goes down, spending does not go down, the debt just increases. It is one of several factors that show the inability to properly hold any level of budgeting ability. So as we look at the top 5 mentioned earlier, they represent 44.2% at 250 billion, giving us 566 billion, when we consider that France had a GDP of $2.8 trillion, we end up seeing that Export makes up slightly more than 20% of GDP, which is too low. What does speak for France is the fact that their economy seems to be decently diversified. So the negative impact of one industry is not as intense as some other countries face. Still with 5.7 trillion in debt, the French have quite the uphill battle to face, I honestly cannot say whether within the EEC or not, within the Euro or not is the best solution, but as European rules get ignored more and more, as governments are setting ‘new’ targets, we see that within either the Euro or the EEC is not ever going to be a solution. As several countries are trying to get cosy with China and as we now see statements that ‘7% growth is not set in stone’, we must all realise that every nation in the world is matching bad news management with the need to be seen as in ‘deflating’, so negative inflating it is. Who are they kidding?

This all comes to blow with the final Guardian article (at http://www.theguardian.com/commentisfree/2015/oct/24/india-rather-than-china-target-of-britains-charm-offensive) titled ‘Perhaps India, rather than China, should be the target of Britain’s charm offensive‘, which is a fair statement by Ian Jack, yet I have been advocating for a stronger Commonwealth link for a long time. Will it be the better deal? That is a separate question, yet in all this, stronger Commonwealth ties also means and implies that overall a stronger Commonwealth would be the result. A thought that should benefit many people within the Commonwealth.

 

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