The Current Global Economic Worry Is More Deflation than Inflation

We’re listening to the latest economic and market analysis from the smart gents at GaveKal research and during the talk we were reminded of some conditions that existed during the most intense phase of the technology bubble of 1999 and 2000.

It’s obvious that China has been financing US consumption so that they could enjoy the growth that has helped to propel their economy. Equally true but less obvious is that Germany has been doing the same thing for weaker countries in Europe to the tune of a few percentage points of GDP.

Some may not remember that in 1999 we witnessed some extreme business practices. A startup company would accept a large investment from a larger company. At the same time the large company would be come a “marque customer” of the startup. On top of that cozy mutual reward system the startup would offer the larger company payment terms, basically financing their purchase.

In retrospect it is difficult to imagine that investors tolerated this type of activity. But tolerate they did and until the dam broke early in 2000 many embraced it with both arms.

Right now this same type of activity is going on with respect to China, the US, Germany and many of the EU countries. Of course the scale of these operations is vastly larger than what happened in the US technology sector back in 1999. But it has been going on for some time and there is no way to know how long it will continue. Some have speculated that the Germans tolerate it because the average man on the street doesn’t realize that it is going on and for those that do realize it’s a bit like a fatal embrace. If Germany were to clamp down, their own economy would tank. The same situation vis a vis China has been discussed ad nauseam.

What should one make of this? In the short term there doesn’t appear to be much to do about it. The US and the global economy have stabilized and are recovering. All economic players are committed to maintaining easy money for some time and the current worry is more deflation than inflation. Nearly all the players have a strong shared interest in maintaining this broadly faith-based system of measures to keep all the plates spinning.

We thought that a piece we published back in April of 2007 “What would Godel do?” was now very much out of date but it may come in handy again.

Comments

[untrusting ...:]

Keep the plates spinning .... how? The system and the economy in the US is broken/screwed. The oligarchs and the politicans are temporarily keeping it alive by artifical asset price support, but they can only do that for a little while longer. Meanwhile the insiders, oligarchs, and those in the know are selling as fast as they can.

Just saw a couple of interesting news stories on the PBS nightly news.
1) Healthcare - Holland/Netherlands just converted in 2006 (think it was) to mandatory national health insurance. They even mandated it was 100% to be run by private companies. No citizen can be refused covereage by the private insurers regardless of age, sickness, or any other condition. The Dutch pay on average $160/month for basic health insurance.They can pay extra for extra coverage such as dental, cosmetic surgery coverage, etc. Total national cost is about 7% of GDP for Holland, less than 1/2 the cost in the US and they have far far better health results and outcomes than the US. Only the US is arrogant enough to think they can spend 2-10x what any other developed country spends on healthcare and still remain a viable economy.
2) Manhattan commercial real estate - was a story on NY/Manhattan commercial real estate by a LT commercial broker. He did a walk around and pointed out all the empty commercial real estate and all the development projects on shut-down. He pointed out one large commercial office building that was sold 2 years ago for $1.7 billion with 1% down. Today it is 50% vacant and was defaulted on. A new purchaser just brought it for $600 million, a 66% decline in value in 2 years. He estimated that their tracking system shows that as much as $1 trillion in commercial real estate in the US will default or go bankrupt in the next 2 years. He mentioned that commercial properties in Florida were selling for as little as 10-15 cents on the dollar. He mentioned that in NY almost any commercial real estate can get their loans/mortgages extented now, if they are making any payments at all, as the lenders simply do not want to take title to any more commercial real estate in NY.

The reality is the US is in big trouble, and the politicans and oligarchs will continue to misrepresent and use any means possible to falsely prop up the markets until such time as they have secured their own wealth. But make no mistake, it will come crashing back down once they have secured their own postions.

Oct 06 09:24 PM