A Fiscal Disappointment - Of Tax Reform & Growth Fairies

Via RealInvestmentAdvice.com,

I encourage you to take a few minutes to review my previous analysis of the effectiveness of tax cuts on the economy.

• Bull Trap – The False Promise Of Tax Cuts


• 3-Myths About Tax Cuts


• It’s The Debt, Stupid

The Committee For A Responsible Budget penned after the passage of the tax bill:

“The House approved debt-financed tax cuts based on predictions of magical economic growth that defy history and all credible analyses.

 

Tax reform should grow the economy and not add to the debt. Unfortunately, lawmakers are assuming faster economic growth will pay for that debt increase when there is no evidence it will cover more than a fraction of the tax bill’s costs.

 

The last time Congress added 10-figures worth of tax cuts to the debt in 2001, it blew a hole in the budget and helped erase our surpluses — despite claims that economic growth would cover the cost. 

 

The growth fairy did not appear then, and it would be unwise to assume she will this time around.”

Read that again.

Despite claiming to be “fiscally conservative,” what is so amazing is that Republicans are considering doing this when debt is at the highest level in history and climbing.

When the “Reagan” tax cuts of were passed, debt was less than 50% of GDP, inflation and interest rates were high and falling, and the economy was just recovering from back to back recessions. When the “Bush” tax cuts were passed, debt to GDP was only slightly higher than under Reagan but despite the tax cuts, the economy slid into a recession compounded by the “dot.com” bust.

Currently, debt is 104% of GDP — higher than any time in history, the economy has been in a 9-year expansion at the lowest rate of growth on record, and interest rates and inflation are low with the Fed hiking rates and reducing monetary support.

The situation currently is much more like Bush versus Reagan.

Lastly, despite the continuing “talking points” that “tax cuts” spur economic growth and will pay for themselves over time….there is no evidence to support that claim.

Given we are projected to borrow another $10 trillion over the coming decade. Republicans should be looking for “fiscally responsible” tax reform rather than piling another $2.2 trillion on top of it.

As the CRFB concludes:

“Instead of trickling down economic growth, the House plan will unleash a tidal wave of debt that will ultimately slow wage growth and hurt the economy.”

The market WILL figure this out eventually, and the consequences will not be good.

Why America"s Retail Apocalypse Could Accelerate Even More In 2018

Authored by Michael Snyder via The Economic Collapse blog,

Is the retail apocalypse in the United States about to go to a whole new level? 

That is a frightening thing to consider, because the truth is that things are already quite bad.  We have already shattered the all-time record for store closings in a single year and we still have the rest of November and December to go. 

Unfortunately, it truly does appear that things will get even worse in 2018, because a tremendous amount of high-yield retail debt is coming due next year. 

In fact, Bloomberg is reporting that the amount of high-yield retail debt that will mature next year is approximately 19 times larger than the amount that matured this year…

Just $100 million of high-yield retail borrowings were set to mature this year, but that will increase to $1.9 billion in 2018, according to Fitch Ratings Inc. And from 2019 to 2025, it will balloon to an annual average of almost $5 billion. The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20 percent, to $35 billion, and the industry’s leveraged loans are up 15 percent, to $152 billion, according to Bloomberg data.

 

Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s.

Can you say “debt bomb”?

For those of you that are not familiar with these concepts, high-yield debt is considered to be the riskiest form of debt.  Retailers all over the nation went on a tremendous debt binge for years, and many of those loans never should have been made.  Now that debt is going to start to come due, and many of these retailers simply will not be able to pay.

So how does that concern the rest of us?

Well, just like with the subprime mortgage meltdown, the “spillover” could potentially be enormous.  Here is more from Bloomberg…

The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.

I have written extensively about Sears and other troubled retailers that definitely appear to be headed for zero.  But one major retailer that is flying below the radar a little bit that you should keep an eye on is Target.  For over a year, conservatives have been boycotting the retailer, and this boycott is really starting to take a toll…

Target has been desperately grasping at ideas to recover lost business, including remodeling existing stores and opening smaller stores, lowering prices, hiring more holiday staff and introducing a new home line from Chip and Joanna Gaines. But Target stock remains relatively stagnant, opening at 61.50 today—certainly nowhere near the mid-80s of April 2016, when the AFA boycott began.

In the past, retailers could always count on the middle class to bail them out, but the middle class is steadily shrinking these days.  In fact, at this point one out of every five U.S. households has a net worth of zero or less.

And we must also keep in mind that we do not actually deserve the debt-fueled standard of living that we are currently enjoying.  We are consuming far more wealth than we are producing, and the only way we are able to do that is by going into unprecedented amounts of debt.  The following comes from Egon von Greyerz…

Total US debt in 1913 was $39 billion. Today it is $70 trillion, up 1,800X. But that only tells part of the story. There were virtually no unfunded liabilities in 1913. Today they are $130 trillion. So adding the $70 trillion debt to the unfunded liabilities gives a total liability of $200 trillion.

 

In 1913 US debt to GDP was 150%. Today, including unfunded liabilities, the figure becomes almost 1,000%. This is the burden that ordinary Americans are responsible for, a burden that will break the US people and the US economy as well as the dollar.

The only possible way that the game can go on is to continue to grow our debt much faster than the overall economy is growing.

Of course that is completely unsustainable, and when this debt bubble finally bursts everything is going to collapse.

We don’t know exactly when the next great financial crisis is coming, but we do know that conditions are absolutely perfect for one to erupt.  According to John Hussman, it wouldn’t be a surprise at all to see stock prices fall more than 60 percent from current levels…

At the root of Hussman’s pessimistic market view are stock valuations that look historically stretched by a handful of measures. According to his preferred valuation metric — the ratio of non-financial market cap to corporate gross value-added (Market Cap/GVA) — stocks are more expensive than they were in 1929 and 2000, periods that immediately preceded major market selloffs.

 

“US equity market valuations at the most offensive levels in history,” he wrote in his November monthly note. “We expect that more extreme valuations will only be met by more severe losses.”

 

Those losses won’t just include the 63% plunge referenced above — it’ll also be accompanied by a longer 10 to 12 year period over which the S&P 500 will fall, says Hussman.

A financial system that is based on a pyramid of debt will never be sustainable. 

As I discuss in my new book entitled “Living A Life That Really Matters”, the design of our current debt-based system is fundamentally flawed, and it needs to be rebuilt from the ground up.

The borrower is the servant of the lender, and our current system is designed to create as much debt as possible.  When it inevitably fails, we need to be ready to offer an alternative, because patching together our current system and trying to re-inflate the bubble is not a real solution.

*  *  *

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

How The Fed Destroyed The Functioning American Democracy And Bankrupted The Nation

Authored by Chris Hamilton via Econimica blog,

I hope this article brings forward important questions about the Federal Reserves role in the US and I openly admit this is by no means a comprehensive article...it simply attempts to begin a broader dialogue about the financial and economic impacts of allowing the Federal Reserve to direct America"s economy.

Against the adamant wishes of the constitutions framers, in 1913 the Federal Reserve System was Congressionally created.  According to the Fed"s website, "it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system."  Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was supposedly established to serve the public interest.

A quick overview; monetary policy is the Federal Reserves actions, as a central bank, to achieve three goals specified by Congress: maximum employment, stable prices, and moderate long-term interest rates in the United States.  The Federal Reserve conducts the nation"s monetary policy by managing the level of short-term interest rates and influencing the availability and cost of credit in the economy.  Monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates.  Through these channels, monetary policy influences spending, investment, production, employment, and inflation in the United States.

I suggest what truly happened in 1913 was that Congress willingly abdicated a portion of its responsibilities, and through the Federal Reserve, began a process that would undermine the functioning American democracy.  How, you ask?  The Fed, believing the free-market to be "imperfect" (aka; wrong) believed it should control and set interest rates, determine full employment, determine asset prices; not the "free market".  And here"s what happened:

• From 1913 to 1971, an increase of  $400 billion in federal debt cost $35 billion in additional annual interest payments.


• From 1971 to 1981, an increase of $600 billion in federal debt cost $108 billion in additional annual interest payments.


• From 1981 to 1997, an increase of $4.4 trillion cost $224 billion in additional annual interest payments.


• From 1997 to 2017, an increase of $15.2 trillion cost "just" $132 billion in additional annual interest payments.

Stop and read through those bullet points again... and one more time.  In case that hasn"t sunk in, now check the chart below...

What was the impact of all that debt on economic growth?  The yellow line in the chart below shows the annual net impact of economic growth (in part, spurred by the spending of that new debt)...gauged by GDP (blue columns) minus the annual rise in federal government debt (red columns).  When viewing the chart, the problem should be fairly apparent.  GDP, subtracting the annual federal debt fueled spending, shows the US economy is collapsing except for counting the massive debt spending as "economic growth".

Same as above, but a close-up from 1981 to present.  Not pretty.

Consider since 1981, the Federal Reserve set FFR % (Federal Funds rate %) is down 94% and the associated impacts on the 10yr Treasury (down 82%) and the 30yr Mortgage rate (down 77%).  Four decades of cheapening the cost of servicing debt has incentivized and promoted ever greater use of debt.

Again, according to the Fed"s website, "it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system."  However, the chart below shows the Federal Reserve policies impact on the 10yr Treasury, stocks (Wilshire 5000 representing all publicly traded US stocks), and housing to be anything but "safer" or "stable".

Previously, I have made it clear the asset appreciation the Fed is providing is helping a select few at the expense of the many, HERE.

But a functioning democratic republic is premised on a simple agreement that We (the people) will freely choose our leaders who will (among other things) compromise on how taxation is to be levied, how much tax is to be collected, and how that taxation is to be spent.  The intervention of the Federal Reserve into that equation, controlling interest rates, outright purchasing assets, and plainly goosing asset prices has introduced a cancer into the nation which has now metastasized.

In time, Congress (& the electorate) would realize they no longer had to compromise between infinite wants and finite means.  The Federal Reserves nearly four decades of interest rate reductions and a decade of asset purchases motivated the election of candidates promising ever greater government absent the higher taxation to pay for it.  Surging asset prices created fast rising tax revenue.  Those espousing "fiscal conservatism" or living within our means (among R"s and/or D"s) were simply unelectable.

This Congressionally created mess has culminated in the accumulation of national debt beyond our means to ever repay.  As the chart below highlights, the Federal Reserve set interest rate (Fed. Funds Rate=blue line) peaked in 1981 and was continually reduced until it reached zero in 2009.  The impact of lower interest rates to promote ever greater national debt creation was stupendous, rising from under $1 trillion in 1981 to nearing $21 trillion presently.  However, thanks to the seemingly perpetually lower Federal Reserve provided rates, America"s interest rate continually declined inversely to America"s credit worthiness or ability to repay the debt.

The impact of the declining rates meant America would not be burdened with significantly rising interest payments or the much feared bond "Armageddon" (chart below).  All the upside of spending now with none of the downside of ever paying it back or even simply paying more in interest.  Politicians were able to tell their constituencies they could have it all...and anyone suggesting otherwise was plainly not in contention.  Federal debt soared and soared but interest payable in dollars on that debt only gently nudged upward.

• In 1971, the US paid $36 billion in interest on $400 billion in federal debt...a 9% APR.


• In 1981, the US paid $142 billion on just under $1 trillion in debt...a 14% APR.


• In 1997, the US paid $368 billion on $5.4 trillion in debt or 7% APR...and despite debt nearly doubling by 2007, annual interest payments in "07 were $30 billion less than a decade earlier.


• By 2017, the US will pay out about $500 billion on nearly $21 trillion in debt...just a 2% APR.

The Federal Reserve began cutting its benchmark interest rates in 1981 from peak rates.  Few understood that the Fed would cut rates continually over the next three decades.  But by 2008, lower rates were not enough.  The Federal Reserve determined to conjure money into existence and purchase $4.5 trillion in mid and long duration assets.  Previous to this, the Fed has essentially held zero assets beyond short duration assets in it"s role to effect monetary policy.  The change to hold longer duration assets was a new and different self appointed mandate to maintain and increase asset prices.

But why the declining interest rates and asset purchases in the first place?

The Federal Reserve interest rates have very simply primarily followed the population cycle and only secondarily the business cycle.  What the chart below highlights is annual 25-54yr/old population growth (blue columns) versus annual change in 25-54yr/old employees (black line), set against the Federal Funds Rate (yellow line).  The FFR has followed the core 25-54yr/old population growth...and the rising, then decelerating, now declining demand that represented means lower or negative rates are likely just on the horizon.

Below, a close-up of the above chart from 2000 to present.

Running out of employees???  Each time the 25-54yr/old population segment has exceeded 80% employment, economic dislocation has been dead ahead.  We have just exceeded 78% but given the declining 25-54yr/old population versus rising employment...and the US is likely to again exceed 80% in 2018.

Given the FFR follows population growth, consider that the even broader 20-65yr/old population will essentially see population growth grind to a halt over the next two decades.  This is no prediction or estimate, this population has already been born and the only variable is the level of immigration...which is falling fast due to declining illegal immigration meaning the lower Census estimate is more likely than the middle estimate.

So where will America"s population growth take place?  The 65+yr/old population is set to surge.

But population growth will be shifting to the most elderly of the elderly...the 75+yr/old population.  I outlined the problems with this previously HERE.

Back to the Federal Reserve, consider the impact on debt creation prior and post the creation of the Federal Reserve:

• 1790-1913: Debt to GDP Averaged 14%


• 1913-2017: Debt to GDP Averaged 53%
  
  • 1913-1981: 46% Average
  
  
  • 1981-2000: 52% Average
  
  
  • 2000-2017: 79% Average
  
  

As the chart below highlights, since the creation of the Federal Reserve the growth of debt (relative to growth of economic activity) has gone to levels never dreamed of by the founding fathers.  In particular, the systemic surges in debt since 1981 are unlike anything ever seen prior in American history.  Although the peak of debt to GDP seen in WWII may have been higher (changes in GDP calculations mean current GDP levels are likely significantly overstating economic activity), the duration and reliance upon debt was entirely tied to the war.  Upon the end of the war, the economy did not rely on debt for further growth and total debt fell.

Any suggestion that the current situation is like any America has seen previously is simply ludicrous.  Consider that during WWII, debt was used to fight a war and initiate a global rebuild via the Marshall Plan...but by 1948, total federal debt had already been paid down by $19 billion or a seven percent reduction...and total debt would not exceed the 1946 high water mark again until 1957.  During that "46 to "57 stretch, the economy would boom with zero federal debt growth.

• 1941...Fed debt = $58 b (Debt to GDP = 44%)


• 1946...Fed debt = $271 b (Debt to GDP = 119%)
  
  • 1948...Fed debt = $252 b <$19b> (Debt to GDP = 92%)
  
  
  • 1957...Fed debt = $272 b (Debt to GDP = 57%)
  
  

If the current crisis ended in 2011 (recession ended by 2010, by July of  2011 stock markets had recovered their losses), then the use of debt as a temporary stimulus should have ended?!?  Instead, debt and debt to GDP are still rising.

• 2007...Federal debt = $8.9 T (Debt to GDP = 62%)


• 2011...Federal debt = $13.5 T (Debt to GDP = 95%)


• 2017...Federal Debt = $20.5 T (Debt to GDP = 105%)

July of 2011 was the great debt ceiling debate when America determined once and for all, that the federal debt was not actually debt.  America had no intention to ever repay it.  It was simply monetization and since the Federal Reserve was maintaining ZIRP, and all oil importers were forced to buy their oil using US dollars thanks to the Petrodollar agreement...what could go wrong?

*  *  *

But who would continue to buy US debt if the US was addicted to monetization in order to pay its bills?  Apparently, not foreigners.  If we look at foreign Treasury buying, some very notable changes are apparent beginning in July of 2011:

1. The BRICS (Brazil, Russia, India, China, S. Africa...represented in red in the chart below) ceased net accumulating US debt as of July 2011.


2. Simultaneous to the BRICS cessation, the BLICS (Belgium, Luxembourg, Ireland, Cayman Island, Switzerland...represented in black in the chart below) stepped in to maintain the bid.


3. Since QE ended in late 2014, foreigners have followed the Federal Reserve"s example and nearly forgone buying US Treasury debt.

China was first to opt out and began net selling US Treasuries as of August, 2011 (China in red, chart below).  China has continued to run record trade driven dollar surplus but has net recycled none of that into US debt since July, 2011.  China had averaged 50% of its trade surplus into Treasury debt from 2000 to July of 2011, but from August 2011 onward China stopped cold.

As China (and more generally the BRICS) ceased buying US Treasury debt, a strange collection of financier nations (the BLICS) suddenly became very interested in US Treasury debt.  From the debt ceiling debate to the end of QE, these nations were suddenly very excited to add $700 billion in near record low yielding US debt while China net sold.

The chart below shows total debt issued during periods, from 1950 to present, and who accumulated the increase in outstanding Treasurys.

The Federal Reserve plus foreigners represented nearly 2/3rds of all demand from "08 through "14.  However, since the end of QE, and that 2/3rds of demand gone...rates continue near generational lows???  Who is buying Treasury debt?  According to the US Treasury, since QE ended, it is record domestic demand that is maintaining the Treasury bid.  The same domestic public buying stocks at record highs and buying housing at record highs.

Looking at who owns America"s debt 2007 through 2016, the chart below highlights the four groups that hold nearly 90% of the debt: 

1. The combined Federal Reserve/Government Accounting Series


2. Foreigners


3. Domestic Mutual Funds


4. And the massive rise in Treasury holdings by domestic "Other Investors" who are not domestic insurance companies, not local or state governments, not depository institutions, not pensions, not mutual funds, nor US Saving bonds.

Treasury buying by foreigners and the Federal Reserve has collapsed since QE ended (chart below).  However, the odd surge of domestic "other investors", Intra-Governmental GAS, and domestic mutual funds have nearly been the sole buyer preventing the US from suffering a very painful surge in interest payments on the record quantity of US Treasury debt.

No, this is nothing like WWII or any previous "crisis". 

While America has appointed itself "global policeman" and militarily outspends the rest of the world combined, America is not at war.  Simply put, what we are looking at appears little different than the Madoff style Ponzi...but this time it is a state sponsored financial fraud magnitudes larger.

The Federal Reserve and its systematic declining interest rates to perpetuate unrealistically high rates of growth in the face of rapidly decelerating population growth have fouled the American political system, its democracy, and promoted the system that has now bankrupted the nation.  And it appears that the Federal Reserve is now directing a state level fraud and farce.  If it isn"t time to reconsider the Fed"s role and continued existence now, then when?

 

Visualizing $63 Trillion Of World Debt

If you add up all the money that national governments have borrowed, it tallies to a hefty $63 trillion.

 

Courtesy of: Visual Capitalist

In an ideal situation, governments are just borrowing this money to cover short-term budget deficits or to finance mission critical projects. However, as Visual Capitalist"s Jeff Desjardins notes, around the globe, countries have taken to the idea of running constant deficits as the normal course of business, and too much accumulation of debt is not healthy for countries or the global economy as a whole.

The U.S. is a prime example of “debt creep” – the country hasn’t posted an annual budget surplus since 2001, when the federal debt was only $6.9 trillion (54% of GDP). Fast forward to today, and the debt has ballooned to roughly $20 trillion (107% of GDP), which is equal to 31.8% of the world’s sovereign debt nominally.

THE WORLD DEBT LEADERBOARD

In today’s infographic, we look at two major measures: (1) Share of global debt as a percentage, and (2) Debt-to-GDP.

Let’s look at the top five “leaders” in each category, starting with share of global debt on a nominal basis:

Together, just these five countries together hold 66% of the world’s debt in nominal terms – good for a total of $41.6 trillion.

Next, here’s the top five for Debt-to-GDP:

While only Italy and Japan here are considered major economies on a global scale, the high debt levels of countries like Greece or Portugal are also important to monitor.

In the IMF’s baseline scenario, Greece’s government debt will reach 275% of its GDP by 2060, when its financing needs will represent 62% of GDP.

 

- A recent IMF report, obtained by Bloomberg

Greece, for example, is continuing along a particularly unsustainable path – and external creditors are getting stingier. Most recently, both the IMF and Greece’s euro-area creditors have demanded for the country to implement a law that automatically introduces austerity measures if a budget surplus of 3.5% of GDP isn’t hit.

While Greece has dismissed such demands as “unacceptable”, the country – along with many others around the globe – will have to accept that constant debt accumulation has eventual consequences.

*  *  *

To get “$63 Trillion of World Debt” in printed form, go to the Kickstarter page now. Deadline: Oct. 31, 2017

Putting America&#039;s Record-Breaking $20 Trillion Debt In Global Context

The U.S. federal government just passed a record $20 trillion in publicly held debt. That’s bigger than the entire economy of every country in the European Union, combined.

As HowMuch.net notes, the debt will only grow higher unless President Trump and the U.S. Congress can agree to unprecedented spending cuts combined with tax increases. 

Don’t count on that happening anytime soon. Most people think that an eye-popping $20+ trillion debt is insurmountable, and in fact, it is the largest in the world by far.

But when you look at another fiscal measure - the ratio of debt-to-GDP - the U.S. is not in the worst situation...

Source: HowMuch.net

HowMuch.net"s visualization allows you to quickly see how the U.S. government’s debt compares to other countries around the world. The size of the country correlates to the size of the debt. The U.S. and Japan stand out because they have the highest debts in the world ($20.17T and $11.59T, respectively). Other countries, like Germany and Brazil, appear much smaller because their debts are comparatively tiny ($2.45T and $1.45T, respectively). We then color-coded each country according to its debt-to-GDP ratio. Green countries have a healthy margin, but dark red and fuchsia countries have debts that are even bigger than their entire economies.

Top 10 countries with the Worst Debt-to-GDP Ratios 

1. Japan (245% at $11.59T)


2. Greece (173% at $338B)


3. Italy (138% at $138B


4. Portugal (133% at $274B)


5. Belgium (111% at $111B)


6. Spain (106% at $106B)


7. Canada (106% at $106B)


8. Ireland (105% at $105B)


9. France (98% at $98B)


10. Brazil (82% at $82B)

The debt-to-GDP ratio is a critical metric for evaluating a country’s fiscal health. It makes a lot of sense for the American government to have a higher debt than a much smaller country, like Germany. Think about it like this: Bill Gates is worth $86 billion, so he can afford a much higher credit card bill than me or you.

That’s why it’s important to consider the Gross Domestic Product (GDP) of each country, a number which represents the sum of all transactions occurring in the economy.

Once you understand the public debt as a percentage of GDP, you get a level playing field for countries on different economic scales. When you think about it like this, the U.S. isn’t even among the ten worst sovereign debts in the world.

S&P Raises Outlook On Greece Ahead Of Bond Sale, Keeps B- Rating

Consider it a kiss to the bond investors who are expected to oversubscribe the upcoming latest "triumphal" Greek return to the bond markets, as soon as next week. Moments ago, rather unexpectedly, S&P raised its outlook on Greece from Stable to Positive, but reaffirmed the Greek rating at B-. The rating agency, said it believes that "recovering economic growth, alongside legislated fiscal reforms and further debt relief, should enable Greece to reduce its general government debt-to-GDP ratio and debt servicing costs through 2020."

We have therefore revised the outlook on Greece to positive from stable while affirming our "B-" long-term foreign and local currency sovereign credit ratings.

The positive outlook indicates our view that, over the next 12 months, there is at least a one-in-three probability that we could raise the ratings.

In other words, buy the Greek bonds, but beware a repeat of what happened in 2014.

Full S&P note below (link):

Outlook On Greece Ratings Revised To Positive; "B-" Long-Term Ratings
Affirmed

RATING ACTION

On July 21, 2017, S&P Global Ratings revised the outlook on the Hellenic
Republic (Greece) to positive from stable. We affirmed the "B-/B" long- and
short-term foreign and local currency sovereign credit ratings.

RATIONALE

The outlook revision reflects our expectation that Greece"s general government
debt and debt servicing costs will gradually decline, supported by economic
recovery, legislated fiscal measures through 2020, and a commitment from
Greece"s creditors, specifically from the Eurogroup, to further improve the
sustainability of its sovereign debt burden.

The Eurogroup, in its statement on June 15, 2017, has agreed to facilitate
market access for Greece through the creation of a cash buffer via
disbursements over and above the amount needed for the Greek government to
meet debt servicing obligations and pay down domestic arrears. In our opinion,
this support is likely to pave the way for Greece to successfully reenter
sovereign bond markets this year.

We also understand that the Eurogroup has reiterated its intention to provide
Greece with further extensions on loans from the European Financial Stability
Facility, as well as deferrals on debt service at the conclusion of the
European Stability Mechanism (ESM) program in August of next year. These
loans, contracted during Greece"s second program, constitute the largest chunk
of Greek government debt. Such additional measures, once put into effect, will
further lengthen Greece"s debt maturity profile--from more than 18 years
presently--and reduce its annual gross financing needs. The amortization of
Greek debt will peak in 2019 at about €13.5 billion, an estimated 7% of GDP; however, we expect the government to issue market debt to smooth upcoming
redemptions, including the 2019 maturities. In every other year from 2018
until 2023, we estimate that repayment obligations will be less than 4% of
GDP.

There are as yet no specifics on the precise form of further financial
assistance to Greece, if any, after the current ESM program is concluded next
year. However, given the considerable financial assistance and political
capital invested in Greece by its European creditors since the start of the
crisis, we believe that support--in the form of technical assistance and
further measures toward long-term debt relief--is likely to remain strong in
the years to come, albeit tied to conditionality.

Moreover, we consider it to be significant that euro-area governments are in
broad agreement on the outlines of a plan to link debt relief for Greece to
any divergence of actual nominal GDP growth from growth assumptions in the ESM
program"s debt sustainability analysis.

We note that the implementation of this plan, once finalized, is conditional
on Greece"s compliance with its ongoing loan program. While Greece is expected
to exit the current program in 2018, its policymakers have legislated measures
until 2020, including cuts to pensions and the income tax allowance, as well
as structural reforms, such as changes to facilitate out-of-court debt
workouts. This allowed Greece"s creditors to conclude the second review of the
current ESM program and to sanction a disbursement of €8.5 billion (about 4%
of GDP).

We believe that implementation challenges of further fiscal measures and other
potentially unpopular reforms--such as those related to the product and labor
markets, public administration, and privatization--remain significant. Most of
Greece"s tax burden falls upon a subsection of the private sector under
pressure from difficult credit conditions, an unpredictable business
environment, and a challenging macroeconomic setting. Tax evasion remains
widespread. Progress on privatizing state assets has been limited in
comparison to the long-term privatization target of €50 billion (about 30% of
GDP). Finally, the liquidity positions of key government-related entities,
including electric utility the Public Power Corporation, remain precarious due
to payment arrears in the public and private sector.

Even so, we anticipate broad compliance with the current program"s targets
until it ends in August next year. The recovering economy, boosted by July"s
ESM disbursement of €0.8 billion (0.4% of GDP) for arrears clearance, will
help authorities meet most of the fiscal conditionality, as indirect tax
receipts (particularly VAT) should perform well. Incentives for the government
to comply with the program remain considerable. The European Central Bank
(ECB), which lends to Greece subject to program compliance, will continue to
be a critical source of funding for Greece"s banks until deposits return to
the Greek financial system. The future return of deposits into the domestic
financial system will, in turn, depend upon policy stability and further
economic recovery. We therefore think Greece is likely to comply with the
program"s stipulations--albeit with delays--because the reversal of previously
legislated reforms could render ineligible the pool of Greek government bonds
that Greek banks use as collateral to access liquidity from the ECB. Another
reason is that the prospect of additional debt relief, which also lowers the
government"s gross financing needs, could further encourage Greece to stay the
course.

Accordingly, we project that over 2017-2020 Greece will report general
government primary surpluses of about 3% of GDP annually on average, alongside
average nominal GDP growth of 2.8%, which should allow general government debt
to decline to 158% of GDP in 2020 from 179% in 2016. Our debt-to-GDP
projections are highly contingent on an acceleration of real and nominal GDP,
though we do note that recent fiscal performance has been encouraging.
Moreover, we do not exclude the possibility of a more flexible approach from
Greece"s creditors toward its compliance with the highly ambitious and
potentially self-defeating medium-term primary surplus target of 3.5% of GDP.
In 2016, the general government primary surplus was 3.9% of GDP, well above
the program"s target of 0.5%. While much of the fiscal outperformance during
the year came from expenditure restraint, which weighed on growth, some of the
adjustment was also on the revenue side. General government revenues increased
by 3%, reflecting higher revenues from indirect taxes and higher personal
income taxes.

The Greek banking system remains impaired, though we do not view as imminent
the risk of another round of recapitalization by the sovereign. Nonperforming
exposures (NPEs) still constitute nearly half of systemwide loans. Initiatives
to tackle the high stock of NPEs are underway, including for instance
legislation to facilitate out-of-court restructuring, the development of a
secondary market, and electronic auctions.

The ratings are constrained by Greece"s high general government debt, which
translates into the second highest debt-to-GDP ratio of all the sovereigns we
rate; low economic growth rates that have eroded income levels over the past
decade and caused price and wage trends to diverge markedly from the rest of
the euro area; the highest unemployment rate in the euro area; and
considerable structural challenges, such as adverse demographics, large social
security deficits, and an impaired banking system that challenges the
transmission of the ECB"s monetary policy into Greece. The ratings are
supported by the low cost of servicing much of Greece"s general government
debt burden; primary surpluses, which if sustained could gradually lower
Greece"s debt relative to GDP; ongoing support from creditors in the form of
very long-dated concessional loans; and a new commitment to facilitate market
access via the creation of liquidity buffers and further debt relief.

We project that the ratio of net general government debt to GDP will continue
declining, after reaching 170% in 2016, but will not be below 150% of GDP
until 2021. Greece"s net general government debt remains the second highest of
the 130 sovereigns we rate. However, the cost of new loans for Greece, under
the current program, is significantly lower than the average cost of
refinancing for the majority of sovereigns rated in the "B" category. We
anticipate that even with the Greek sovereign"s reentry into commercial bond
markets, the proportion of commercial debt will remain less than 15% of total
general government debt through to the end of 2020. We therefore expect a
gradual reduction in interest costs relative to government revenues. The
average remaining term of Greece"s debt is an estimated 18 years, which is one
of the longest among rated sovereigns. For this reason, Greece"s official
creditors as well as the International Monetary Fund have benchmarked the
ratio of Greece"s annual general government gross financing needs to GDP as a
metric for debt sustainability, alongside the debt-to-GDP ratio.

OUTLOOK

The positive outlook indicates our view that, over the next 12 months, there
is at least a one out of three probability that we could raise our "B-"
ratings on Greece.

We could consider an upgrade if commitments from the Eurogroup to provide
further debt relief were approved, allowing for a further reduction in the
costs of sovereign debt servicing and a further terming out of the government
debt profile. Rating upside could also stem from a period of stable economic
growth and a recovery of the labor market. We could also consider an upgrade
if the banking sector further reduces its reliance on official funding,
reflecting a gradual return of confidence and deposits to the system or access
to market financing.

We could revise the outlook back to stable if legislated reforms, critical to
ongoing creditor support, are reversed, endangering further debt relief
measures; or if growth outcomes are significantly weaker than our
expectations, thereby restricting Greece"s ability to continue fiscal
consolidation and debt reduction.

Bond Yields - "You Ain&#039;t Seen Nothin&#039; Yet"

In Limbo or Playing Limbo?

We often refer to the state of being ‘in limbo’ as stuck on the edge of hell with no resolution… But remember, limbo is also a dance from Trinidad in which people compete to dance lower and lower under a bar until someone eventually collapses. This week in The Big Call we ask, how low can global bond yields go; and what could raise the bar, or will bond yields be stuck at current levels forever?

Bond bull alive and kicking?

The secular trend of declining bond yields has seen prices rise inexorably during a 30-year bull market. Our call from April 7^th was to go long TLT on a short-term view – which has returned a decent 3.5% to date. But how long can this return continue in the face of rising leverage and deteriorating demographics? That’s something we considered in the Are You On This Yet? section of The Hack on May 19^th…

Drowning in debt

Jawad Mian’s thought-provoking symposium this week, A Dozen Ideas to Get You Thinking Differently, sets up our discussion nicely:

“The US economic return on additional debt has fallen to about 20 cents on the dollar. That means 80 cents is servicing existing debt, which has been borrowed for the purpose of supporting unproductive consumption and jobs. This makes economic growth very sensitive to changes in interest rates.”

The diminishing return of each new unit of debt is making it harder and harder for governments and corporations alike to juice their growth and returns. With debt levels so high, the service costs become punishing. To avoid a default, interest rates must remain structurally lower for longer just to support the present debt. Furthermore, the debt has to grow just to service the exisitng debt. Think about that for a second?

Are higher rates already the death knell for the US economy?

“It would only take a 20% backup in interest rates before the debt service becomes problematic (depending on duration and the amount of outstanding debt). The 10-year Treasury yield nearly doubled from the summer 2016 low, which suggests the US economy is about to slow down, rather sooner than later.”

The economy is slowing, and yet with these debt levels across the world, the growth rate required to get out from under them is essentially mathematically impossible to achieve:

The path of least resistance for central banks becomes structurally lower interest rates, since a widespread debt jubilee is too politically unpopular, for now. That comes later.

Central banks are stuck between a rock and a hard place.

• how to prevent those low rates blowing up (even bigger) asset bubbles


• how to keep banks profitable so they can recapitalise organically


• how to have any levers of monetary policy left during the next major downturn

Across the world central banks are in a bind, and so developed bond markets are sleepwalking toward a Japanese-style scenario of negative bond yields and a deflationary psychology.

*  *  *

Global bonds – The world tour

China

At the government level Chinese debt-to-GDP looks very reasonable at around 43%; but if we add in all the local debt, state-owned enterprises, and other forms of debt we get estimates of more like 250% of GDP, which makes China look rather Japanese. China does, however, have one advantage, which is a high GDP growth rate that can be used to shrink that debt load – but with so much growth generated from debt-fuelled investment rather than consumption, it will be hard structurally to grow the economy whilst weaning it off the debt.

Chinese government bond yields have been on the rise, which may actually reflect positive fundamentals in the economy. As Jim Walker’s Wealthy Nations observed in March,

“The rise in rates is a reflection of success and economic acceleration, not a reflection of economic problems. China will increase interest rates not because the authorities are worried about over-indebtedness and/or the amount of credit being extended.”

Cyclically, then, China seems OK for now – the PBOC has been stepping in with liquidity when needed as they try to steer the economy towards some corrective actions. However, the jury is out on how long they can keep this up.

For more in-depth consideration of Chinese debt dynamics, remember to check out CrossBorder Capital’s “The Financial Silk Road”.

US

The 10-year Treasury currently yields around 2.2%, a very low return by historical standards, especially when debt-to-GDP has ballooned to over 100%. Both metrics are now at their post-war level. Will foreigners question the US’s creditworthiness and abandon their debt?

As long as the USD remains the global reserve currency, demand for dollar debt will be high; and only the US bond market has the depth for this size of capital flows – i.e. many holders of Treasuries buy them for reasons other than risk/reward.

OK – but the world could abandon the dollar… Sure, but what’s the next largest alternative? The euro…

Greece

The Grecian debt crisis is now entering its seventh year of tedium. In that time debt-to-GDP has mushroomed from 126% to 179% – a debt level no nation has ever emerged from without some form of default or devaluation. Yet Greek bond yields have fallen from >30% in 2012 to just under 6% today.

With a succession of bailouts, Greece has trundled along on life support. As the old Soviet joke goes, ‘So long as they pretend to pay us, we will pretend to work’.

But what do people who want euro-denominated collateral do, then?

Germany

The 10-year yields are on the floor – 0.25%! This is due to a flight to quality in the Eurozone: If the EU breaks up, you are best off with bunds because the Germans have greater fiscal rectitude (although debt/GDP is still near 70%), and a new Deutsche Mark would be worth a lot more than a freshly minted drachma.

So what are we learning here? Bond yields – especially government ones – are not really reflecting economic risk/reward anymore. They reflect a belief that central banks will ease into perpetuity – or at the very least a belief in the ‘greater fool theory’.

This isn’t theoretical economics confined to classroom textbooks; we only have to look to Japan to see this train wreck in action.

Japan

Japan has a debt-to-GDP ratio of 250%! Yet the 10-year bond yields just a handful of basis points. What could possibly explain this? Deflation. Decades of deflation have meant that owners of any fixed monetary asset will see its value increase over time. Japan was stuck in a debt-deflation cycle until the recent advent of ‘Abenomics’ – the competitive devaluation and money-printing game that everybody else had been playing.

Either way, Japan has avoided default through extremely low interest rates, extremely high domestic bond holdings, and a highly cohesive society, all in combination with a weak currency and an export-led economy. Is this the future for other developed sovereign bonds?

The BoJ have only a plan A: Buy up all the bonds in issue. And after that? You can be sure that Japan will be at the vanguard of the next economic and monetary experiment. Remember that debt jubilee I mentioned?

Japan Debt to GDP vs Japanese Bond Yields

Source: Bloomberg

Could we see a bond scare?

The reality appears to be, it’s unlikely. Yes, an individual country like Greece can suffer a huge bond scare, but for larger nations with printing presses such as the US and Japan, the most likely outcome is simply more debt and more devaluation. And with plenty of money sloshing around chasing too few assets, bonds will probably continue to be bid.

The only thing that would reliably kill the bond market is higher interest rates from central banks. The trouble is, higher rates would also kill the market for everything else and trigger a depression.

Could an inflation scare occur? Demographics, unproductive debt, and technological advancements put the chance of a sustained period of inflation pretty low, despite (or because of) the best efforts of Central Bankers.

Baby Boomers are compounding the problem.

As we noted in The Hack on April 7^th, ‘Baby Boomers Coming of Age’, the backdrop of an ageing demographic and massive pension black holes will structurally cap any rise in interest rates.

‘According to the Federal Reserve, unfunded state and local pension obligations have risen to $1.9 trillion from $292 billion since 2007. Throw in the private sector and that figure is far greater. At the same time pension funds have been pushed up the risk curve as interest rates from fixed income are simply inadequate. Baby Boomers have never been more exposed to equities and are going to start to drawdown their capital for retirement.’

The paradox is this: To fill that black hole and provide fixed income for retirement, we need bond yields above, say, 5%; but with yields above 5% the ability to service the debt mountain collapses and assets are liquidated. Wealth is devastated. Then, all those retirees will be shifting assets from equities into fixed income in the next decade, driving a huge wall of money into a bond market with diminishing yields.

What about cyclical considerations?

We have been stating for some time that the credit cycle is rolling over. Just last week Michael Lewitt noted:

“I no longer expect interest rates to rise significantly from current levels in the current cycle; they are more likely to fall as the economy stays weak and debt continues to build in both the public and private sectors. We could see short-term 25 or 50 basis point spikes in longer rates (10–30 years) based on an errant comment by a central banker or some piece of news, but rates are likely to stay down until the current business cycle, which is very long-in-the-tooth, ends.”

With the Fed raising rates into a slowdown, they will have to backpedal in the near future to soften the economic blow.

"How Does This Ever End?" An Interview With Lacy Hunt

The US economy is struggling with too much debt at every level. A debt jubilee isn’t going to solve it; and shifting demographics will likely make it worse. So, is America headed for two decades of lost growth like Japan? Dr. Lacy Hunt, who was interviewed by Erik Townsend on the latter"s MacroVoices podcast, considers the endgame for the US economy... Well, we could get lucky, Hunt says.

"The US economy could experience a modern equivalent of the California gold rush. In the 1820"s and 1830"s, we took on a lot of debt to finance the early canals, steamship lines railroads - it was over-investment, over consumption. The panic year was 1838. Martin Van Buren was president, he didn"t know what was going on. By this, the country languished very badly for 11 years, and then gold was discovered it California, led to a huge surge in national income, people were very careful how they spent their income.

"We paid off the debt of the 1820"s, 1830"s, and the economy recovered. In 1873, we had another panic year brought on by too much debt that financed the railroads - remember we built the central line first and then the northern and southern routes, a lot of feeder road industries that supplied the railroads over-expanded and it was over-investment, over-consumption.The panic year hit. Grant was no more knowledgeable of what was going on than Van Buren had been in 1838. We had no central bank, the government continued to balance its budget. We had a prolonged period of austerity, but by the early 1890"s, the problem had been solved, and we began to go on our merry way."

"Irrational behavior" on the part of US policy makers means our economy will grow to increasingly resemble Japan"s over the long term...

“I think that our results will mirror Japan over time, certainly not on a quarter to quarter or annual basis, but they’re public and private debt is just under 600% of GDP. Our total public and private debt is about 373%. They"ve tried to solve an indebtedness problem by taking on more debt. There are many many examples of what has happened to extremely over-indebted economies."

Hunt notes that there has been important recent work by Allen Taylor, also by a number of people in Europe. There is also work that’s been done historically. For example, the leader of The Enlightenment, David Hume- his famous paper on public finance, written in 1752 reaches the conclusion that:

...when a state has mortgaged all of its future liabilities, the state, by necessity, lapses into tranquility, languor, and impotence.

And there was Irvin Fisher’s 1933 paper on the consequences of extreme over-indebtedness, including pointing out that

"one of the factors that will happen will be that the velocity of money will be very weak, and so there has been a tremendous amount of work. It’s just generally speaking been ignored."

Hunt points to an excellent summary was published in 2010 by McKinsey Global Institute...

"They looked at 24 advanced economies that became extremely over-indebted. The indebtedness brought on a panic year, such as 1929, 1873, 2008, and they followed the process through to completion.

It’s a very long process, and what it shows is that an indebtedness problem cannot be solved by taking on additional debt.

McKinsey says specifically that multi-year sustained rise in the savings rate, what they term austerity, is needed to solve the problem, and of course, as we all know, in modern democracies, that option doesn’t seem to exist.

So, we try to continue to use what has failed, and while we get transitory improvement in economic activity, the longer-term trend is to weaker and weaker economic performance."

Moving on, Townsend asks, is the secular bull market in bonds really over?

"My view is that the secular low in long treasury bonds is not at hand - doesn’t mean that rates cannot go up, they have gone up quite a number of times since 1990 when this bull run started, but they’re not going to be able to stay up. The economy is too fundamentally weak."

"The main consideration for believing that the trough is not at hand, is that nominal GDP growth and also the inflation rate is not yet at its secular low. There have been many transitory swings that will continue to be transitory swings, but thecritical factors that determines the nominal GDP of both working lower experiencing considerably slower growth and money supply, and at the same time the velocity of money is in a major downtrend."

"In 1997, $1 of new M2 growth increased GDP by $2.20, and the first quarter of this year, it was down to $1.42. This reflects the fact that we have too much of the wrong type of debt. There are many other influences in velocity, but that’s the critical factor.

I think it’s important to remember that the velocity of money is very volatile.

The old secular low was reached at 1.2 in 1946, and that was the year in which we saw the daily, weekly, and monthly lows in the 30 year bond yield. Now, if that is the key factor, not the only factor, but the key factor, which is driving the velocity of money downward, then velocity is going lower because in Europe, which has debt to GDP ratio 100 percentage points higher than the U.S., velocity is at one and in China and Japan, which are also more indebted than the United States, velocity is around 0.5 to 0.6."

So, Dr. Hunt explains, the US debt load willl continue to climb and velocity will continue to slow - unless, of couse, "we get lucky."

The United States Is Hosting A Debt Party – $2,000 Gold Is Coming

“The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals: that it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted…” Thomas Jefferson

The US has seen accelerated debt build-up since the early 1980s, before culminating in the financial crisis of 2008-2009.

You would think everyone would learn their lesson and ease off the gas, but the exact opposite has occurred! Debt levels are now at record highs, staving off GDP growth.

In 2014, debt over took GDP for the first since post-World War II. Unfortunately for the United States, it is no longer the world’s only superpower. After WW2, the US was the beneficiary of having its infrastructure unscathed, and was essentially the world’s manufacturer. The baby boomers benefited immensely, with low tax rates and generous pensions.

Today it’s a different story. Extreme debt has slowed economic growth, and the world’s central banks are forced to print money to continue growing and service debt.

China’s economy grew fast than expected last year, but this of course was throttled by higher government spending and record bank lending. China’s debt to GDP ratio is a staggering 277%, with increasing new credit being used to service debt. Japan’s debt to GDP has increased to 250%, the United Kingdom’s to 123%, and France’s to 122%.

For every dollar of GDP growth, we are adding $1-2 dollars in debt!

What does this mean for gold?

Since the end of Bretton Woods, gold has followed debt. We saw a period of divergence, but this was quickly rectified by a spike of 500% in gold price.

Currently, we are seeing another divergence, and we believe another spike is in the works. While gold is already on the mends, the resulting rally can easily put gold over $2,000/oz. or more.

The world cannot fix its debt problem overnight. In the near future  we see a sustained period of economic drought and gold price abundance.

Read more at www.palisade-research.com

Euro Saves Germany, Slaughters the PIGS, & Feeds the BLICS

Authored by Chris Hamilton via Econimica,

The change in nations Core populations (25-54yr/olds) have driven economic activity for the later half of the 20th century, first upward and now downward.  The Core is the working population, the family forming population, the child bearing population, the first home buying, and the credit happy primary consumer.  Even a small increase (or contraction) in their quantity drives economic activity magnitudes beyond what the numbers would indicate.

To highlight the linkage of Core populations to economic activity, the chart below shows the European 25-54yr/old population vs. the best indicator of economic activity, total energy consumption (data available starting from 1980).  The implications are pretty straightforward.  European economic activity (& resultant energy consumption) will contract for decades, at a minimum, with the declining Core population.  The pie is shrinking and now it"s simply a fight for who gets bigger slices.

Given this, consider Germany was well aware of it"s post WWII collapsing birth rate and the impact of this on economic growth as this shrinking population of young made it"s way into the Core.  Consider Germany"s Core population peaked in 1995 and it"s domestic consumer base has been shrinking since, now down over 3.3 million potential consumers (about a 9% Core decline...remember a depression is a 10% decline in economic activity, which a 9% and growing decline in German consumers would have almost surely induced).

GERMANY

The chart below shows Germany"s Core population from 1950-->2040...but understand this is no guestimate through 2040.  This is simply taking the existing 0-24yr/old population (plus anticipated immigration) and sliding them into the Core through 2040.  Germany"s Core population is set to fall by over 30% or 10+ million by 2040 (far more than the 7 million Germans of all ages who died in WWII).

But Germany had a plan.  With the advent of the EU and Euro just as Germany"s Core began shrinking, Germany was able to avoid the pitfalls of a shrinking domestic consumer base, circumvent the strong German currency, and effectively quadruple it"s effective export market across Europe.  German exports, as a % of GDP, have essentially doubled since the advent of the Euro (22% in "95 to almost 50% in "16).  The chart below highlights Germany"s shrinking Core vs. rising GDP (primarily via exports) since 1995.

And this had the desired effect of turning what was a rising German debt to GDP ratio during re-integration of E. Germany into a falling ratio (chart below).

So the German motivation for the EU and Euro are fairly plain as are the resultant economic transfusion from South to North.  But for Germany to be a winner, there had to be a loser in this shrinking pie game.  Hello PIGS (Portugal, Italy, Greece, Spain), you lost.  As the old poker adage goes, when you don"t know who the sucker at the table is...it"s you.  Particularly when you "win big" at first and it all seems so easy...but then it all turns.

PIGS

The chart below shows the PIGS Core population peaking about 15 years later than in Germany but likewise clearly rolling over.  By 2040, the PIGS Core population will be back at it"s 1960 levels...down from the 2010 peak by 17 million or about a 30% decline.

But if we look at the PIGS combined GDP and Core population...we see a very different picture than in Germany.  The chart below shows the PIGS GDP turned down ahead of the Core population peak.  The rise in GDP in these nations was a credit bubble premised on cheap EU wide interest rates more appropriate for Germany.  Exports as a % of GDP (which were higher than Germany"s in "95) have risen less than half of Germany"s increase (rising as a % primarily due to declining PIGS GDP).  Low German wage increases and high quality German goods helped displace PIGS domestic manufacturing base.

To extend the game a bit longer (and multiply the harm), un-repayable government debt has been substituted to keep the PIGS consuming since 2007 (chart below).

How it played out...

The chart below shows the impact of the implementation of the EU and Euro on the different parties.  Clearly the PIGS were fattened up on cheap credit.  These nations became used to unsustainably fast growth and the good life, buying really nice German exports and undermining their own national brands.

But then the phony PIGS growth turned to real and deep contraction (chart below).  However, the slowdown was quick and shallow for Germany and the BLICS.  French GDP likewise turned upward after a shallow contraction but did so on a large increase in debt and continuing high levels of unemployment.  Quite the opposite of the trends in Germany.

The raw trade data confirms Germany"s gain against an ageing domestic population came at the expense of the PIGS.

BLICS

And just to square the circle, I need to talk a little about the BLICS (Belgium, Luxembourg, Ireland, Cayman Island, and Switzerland...yes, I understand Cayman Island is not in Europe, but bear with me as it is a British Overseas Territory).  These nations with a total population of about 24 million have been disproportionate beneficiaries of the new EU system.  These financier nations have been the biggest winners of all with huge amounts of money flowing through them (BLICS GDP below).

But why would small to tiny financier nations be the greatest beneficiary of the new EU?  Untold quantities of nearly free ECB money & distortions does wonders for those who can get their hands on it.  In this respect, a peek at these nations US Treasury holdings is quite telling.  These tiny nations are now five of the top 13 foreign holders of US Treasury"s (Ireland is #3, and Cayman Island #5, Switzerland #6, Luxembourg #7, and Belgium has slipped to #13).  That these are America"s creditors is laughable really!

I"m just guessing but the timing and size of BLICS Treasury purchases sure looks like it was front running in conjunction with the ECB"s 2011 LTRO and subsequent 2014 TLTRO?!?  The chart below shows the BLICS Treasury holdings back to 2001.  "Financialization" writ large for nations that don"t produce much of anything.

In fact, since the July 2011 debt ceiling debate (debacle?!?) when Congress determined the US would never live within it"s means, it has been the BLICS that have done the heavy lifting to maintain the foreign Treasury bid while China (and cumulative BRICS) have been selling despite record dollar surplus" (chart below).  As an aside, from "00 through July "11, China recycled about 50% of it"s dollar trade surplus into Treasury"s...from July "ll China only continues to sell Treasury"s despite record trade surplus...but luckily the BLICS stepped up just as China and the BRICS bowed out.

The chart below highlights that the BLICS are now, as of January 2017, the largest holder of US Treasury debt overtaking the declining holdings of both Japan and China.

Conclusion:

As Europe"s Core population collapses (and economic activity with it), the Euro and ECB seem to be serving a select few at the expense of the majority.  The imbalances and distortions will only grow as the attempts to mask who the Euro and ECB truly serve continue.  What little vitality exists is being transfused to prop up the few.  Hope this has been thought provoking and make of this what you will.