More Good News From Europe: Borrowing and Inflation on the Rise, Economies Contract

It doesn't look like August 14 is a great news day for Europe. Three news items in particular have been making headlines. As per usual, there is not much good news.

• Eurozone Contracts

In the second quarter the economy of the Eurozone as a whole shrank 0.2 percent compared to the April to June quarter. Some countries have managed some growth, with Germany reporting GDP growth of 0.3 percent thanks to strong exports. France, typically portrayed as one of the stronger players in the eurozone, reported zero percent growth. Portugal and Italy were among the hardest hit by the eurozone's struggling economy, reporting growth figures of -1.2 and -0.7 percent respectively. 

• Spain Borrows Even More Money

Spain's crisis continues to worsen, with borrowing from the European Central Bank reaching a record $463 billion in July, up 11 percent from what was borrowed in June. President of the European Central Bank Mario Draghi has said that Spain can apply for bailout assistance from the bailout fund established by eurozone members, however Spanish Prime Minister Mariano Rajoy has said that he will wait for the ECB to outline its conditions before he makes a decision. 

In other news from Spain Rajoy confirmed that on August 24 the cabinet would meet in order to extend a welfare policy that allows the unemployed to claim payments of $494 a month.

• British Inflation Rises

Inflation in the United Kingdom is up to 2.6 percent. The rise is being blamed on a rise in the cost of airfares and a fall in the number of discount stores. The announcement comes shortly after the Bank of England announced another round of quantitative easing. Inflation could continue to rise if food prices, particularly grain and sugar, continue to increase due to bad harvests. Oil prices could also contribute to a rise in inflation. Although the rise in inflation is worrying some are claiming it is only a "blip", as the trend in the UK for the last few years has been for inflation to go down. British inflation has not dropped below two percent in years, and the United States is currently enjoying an inflation rate of less than two percent. Given that context maybe British economists should be a little more wary.

Comments

[Caleb Turberville]

Wait, inflation contracts economies? That's not what I've been hearing from the experts lately. In fact, it's exactly the opposite.

Judges, I'm gonna need a ruling.

[R C Dean]

Wait, inflation contracts economies?

Your money supply can expand while your economy contracts. In fact, that's pretty much the Keynesian prescription.

The trick is not falling for nominal descriptions of economic size and trends. Otherwise, you will believe that an economy that shrank 4%, while the money supply grew 10%, actually grew by 6%.

[Invisible Finger]

Quantitative Easing is up 2.6% in Britain.

[RedDragon6009]

How soon before they're printing 100 trillion pound notes?

[Suthenboy]

True story

I was in Bolivia back in the mid-eighties when Bolivia was doing the exact same thing. I have plenty of snapshots I took of street vendors of trinkets and cigarettes hauling huge bales of cash to the bank in wheel barrows.

I brought back a huge amount of cash, mostly in 100,00 peso notes with the intent of using them for wall paper. They were absolutely beautiful, top quality notes. It probably cost ten times what they were worth just to print them. Total, the value was probably around 20 bucks.

I never got around to papering them on the wall so they just sat in a chest of drawers all these years. About 2 years ago I had a break in. Yep, you guessed it. The notes went missing. They left everything else. The dolts who took the huge stacks of cash thought they were rich for life and ran straight to the bank with them.

It took me a week to quit laughing about that. No, I am still laughing.

[fried wylie]

Well, if criminals had at least two brain cells to rub together, they'd have jobs as politicians instead.

[fried wylie]

But but but, it's the price of airfares and the lack of discount stores causing inflation!!! Really, it is! C'mon guys, I'm totally cereal!

[R C Dean]

Currently, I have a small short Euro position (EUO, if you like speculating in leveraged ETFs). It is a very crowded trade, as they say, which usually means its time to get out or flip.

The scenario could be that booting the weaker members out of the Euro will result in a stronger currency, kind of like a big corporation shedding its weakest divisions to raise its stock price.

That kind of assumes that the Euro exits of Greece, Spain, etc. will be well-managed, though. I'll probably just put a tight stop-loss on what I have, for now.

[niobiumstudio]

I don't really see how the exit of Greece can really be "well-managed" at this point. I think it will probably be an overnight type decision where Greece is fighting tooth and nail (The Government, at least) to stay in the Euro when they just finally throw in the towel. The more I read about this the more I think it is going to just crash and burn. The Greeks are so accustomed to overspending (like us..) that the cuts they agreed to won't last.

[Jerry on the road]

A Greek exit should be priced in by now, not?

[Tim]

What else do you have that's small and short?

[R C Dean]

Patience.

[Fluffy]

I think we need to be careful about focusing on GDP figures.

The problem with GDP as a statistic is that it includes government spending in the math.

So if you managed to do the impossible and cut government spending 10% across the board, if government spending was 40% of your GDP that means you just shrank GDP 4% right there. That lets Krugabe and his minions claim that all spending cuts are always anti-growth.

If you make the political and economic judgment to cut government spending, you should measure the GDP effect net of the spending cut itself in order to see the real impact.

[niobiumstudio]

But that would make everyone have to admit they were wrong. Real world impact simply doesn't matter in politics - only catchphrases. Without the artificial GDP boost of spending, countries may actually have to admit to negative growth figures.

[fried wylie]

But that would make everyone have to admit they were wrong.

"And by god, I would rather have to subsist on shoe leather than admit being wrong. Well, I'd rather YOU have to eat shoes, I'll be fine."
-Love,
Politicians and Economic Pundits

[GW]

Eventually, the GDP must contract, since so much of it is fueled by debt, both government and consumer.

Buckle up folks, it's gonna be a bumpy ride!

[Rasilio]

Technically this is not true, it would be at least in theory possible for it to merely stagnate for a long time (several decades) while technology and productivity gains caught up to the money supply/debt level and real income growth returned.

Problem is that would require an end to deficit spending at a societal level. This means you could allow continued growth in deficit spending in any one sector of the economy as long as the net of all sectors was $0 deficit (or even better a positive savings rate).

The other problem is that in such a state you would be very sensative to economic shocks for a very long time making it very unlikely that you could keep things stable long enough for productivity to erase the existing debt.

[R C Dean]

I hear ya, Fluff.

Personally, I think a better metric wouldn't be GDP ex government spending, but GDP ex debt (public only? all? not sure).

GDP ex federal debt for the US shows that the economy hasn't really grown much in quite a long time. I haven't tracked down a graph or anything on this, but I'm pretty sure the issuance of federal debt has outpaced nominal GDP growth since at least 2008.

[GW]

That's not a bad idea. people have to realize that the debt must be paid back, and that will reduce GDP at some point in the future. Theoretically of course. We all know that Uncle Sam will just print the money and turn us all into brokeasses when that time comes.

[Rasilio]

From what I can see it looks like GDP minus the Federal Deficit has not grown since 2005 after adjusting for Inflation.

Basically in fixed 2005 dollars the GDP stood at $12.3 Trillion in 2005 and is right back at that level today.

Course that does not take into account the growth in State/Local, Corporate, and Personal debt.

Factor those in and it is likely that there has been no real GDP growth in close to 15 years, only growth in Debt and inflation.