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Italy: Money Flows, Investment Markets And Election Assessment

Mar. 03, 2018 1:30 AM ETEWI, HEWI, DBIT, FLIY6 Comments
Alan Longbon profile picture
Alan Longbon
2.61K Followers

Summary

  • Overall money flows are weak and decelerating, unemployment is high, the scene is set for radical political solutions in the forthcoming election.
  • The current account is stronger and adding income to the private sector, but this income has been used to repay debt and so does not add to aggregate demand.
  • The government has drastically cut spending in 2017 and looks to do the same in 2018 unless a new party can be elected to reverse this trend.
  • Private credit creation by commercial banks is running in reverse with more loans repaid and written off than new ones created.

The purpose of this report is to look at macro money flows in Italy and assess the impact on investment markets.

Italy is having a national election on March 4, 2018, and the outcome will be interesting to see. How do 11% general unemployment, 31.5% youth unemployment, and a shrinking national income affect election outcomes? Could an upstart fringe party get elected and implement the much needed radical change?

I last looked at Italy in this article: Italy ETFs Are A Buy. I have written this update in response to the lead up to the elections. This report was produced using a balance of national accounts assessment of Italy. The Italian situation is very similar to Portugal that I looked at in this article.

One can summarize the national accounts in the following formula:

GDP = Private Sector Spending [P] + Government Sector Spending [G] + External Sector Spending [X]

See the methodology section below for more details on this formula.

Each sector will be examined in turn, starting with the private sector.

Private Sector

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks - More loans created than repaid.

  2. Externally from overseas commerce - More exported than imported.

  3. Government spending - More spent than taxed out.

In an ideal scenario, the private sector would receive large and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow overall even if one or two of the three flows are negative. The stock market in the private sector, as well as all other private financial assets, should rise if

This article was written by

Alan Longbon profile picture
2.61K Followers
My investment approach is very simple. I find countries with the highest and strongest macro-fiscal flows and low levels of private debt and invest in them using country ETFs and contract for difference (CFDs)I use functional finance and sectoral flow analysis of the national accounts of the nations I invest in. This is after the work of Professors Wynne Godley, Micheal Hudson, Steve Keen, and William Mitchell. Roger Malcolm Mitchell, Warren Mosler, Robert P Balan, and many others.One can analyze a country in seconds with four numbers as a % of GDP and these are G P X C where[G] Federal spending.[P] Non-Federal Spending.[X] Net Exports[C] CreditOne can then derive a set of accounting identities that are correct by definition.GDP = G + P + XAggregate Demand = G + P + X + C or GDP + Credit.GDP = GDIG and X are regularly reported in official national account statistics and one can work out P as follows:P = G + XAsset prices rise best where the macro-fiscal flows are strongest and where the private sector balance is highest.The 20-year land/credit cycle identified by Fred Harrison and Phillip Anderson is also a key investment framework that I take into account.

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Comments (6)

Alan Longbon profile picture
Yes I see your point.
Clauser1960 profile picture
Alan, in Italy the center left supports the EU and is supported by the EU, a real alliance. Nobody in the center left is against the Euro. The only chance of regaining some sovereignty, especially but not only in the monetary field, comes from the center right. In the very probable case of a center right government, the fiscal compact and the 3% deficit rule will be openly opposed, and probably a new lira will be introduced, with a double currency system. Add the stop to immigration and the flat income tax, and you will see Italy resurrecting in less than a year. Problems will come from the scandalistic opposition from the left, starting with marxist judges (35% of the total), as usual supported by the EU and by french and german media.
Clauser1960 profile picture
Congratulation for your article. It should be transated in italian and sent to the center left and pro EU politicians who have slowly destroyed Italy over the last 5 years. On Monday the music should change, with the victory of the center right,
Alan Longbon profile picture
Hello and thank you for reading and commenting.

I hope you are right otherwise there is more economic misery to come for Italy.

It does not matter which party wins so long as they regain monetary sovereignty. That said a leftist government is more likely to use sovereign currency creation powers to advance the public purpose than a right-wing conservative party who will use them to benefit only the rich.

Probably we will get a Greece situation where a radical left party gets into power and suddenly becomes a conservative conformist party that does the bidding of the World Bank, IMF, EU and private bondholders and sells out the people that elected it even after a referendum. All roads leading to Rome no matter which one you take.
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