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Financial Sadism

Written by Frank van Empel

What goes up, must come down, and what goes down has to come up some day (or fades away). These are the laws of the market. In the long run most markets grow. At that point they differ from roller coasters, that always arrive where they have started. Growth economies arrive at the same level where they already were before, they fall back a few times and then get even higher than ever. The sky seems to be the limit. Some people want to go faster. Some people even go too fast and go broke. At some point greed turns into fear, and the whole system gets into a spin. There is some method in these systems, which makes that we can foresee some ever returning patterns and so a flash of the future.
Old Chap Dow Jones – a symbol of American stockmarket sentiment – almost scored an all time high in the first week of the year (figure 1) and then fell back a bit, because some early investors cashed.

In the weeks that followed, strong reports on housing starts and claims for unemployment benefits made investors even more optimistic about the U.S. economy. The S&P 500 rose three points to 1,476 shortly after the opening bell Thursday January 17, its highest level since December 2007. The Dow Jones industrial average rose 31 points to 13,542. The Nasdaq composite rose 11 points to 3,128. Another attack in order to break the record of late December 2007.

What kick-started the crisis, the American housing market, is at the basis of the recovery too. U.S. builders started work on homes in December at the fastest pace since the summer of 2008. People just don’t experience it yet. They are still stuck in misery. But if you have the skill to notice patterns in given datastreams, you’ll conclude that spring is already there. The U.S. stock market is running away from the crowd, anticipating a boom in the real economy. A self fulfilling prophecy. Investors in U.S. stocks are riding high again, pushing Joe Sixpack out of the doldrums. It’s already in the numbers. The number of Americans seeking unemployment aid for instance fell to a five-year low, news agencies reported halfway January 2013. The American bull will jump over the Atlantic Ocean within a few months, like the bear did five years ago. Europe is ready for it. Especially Germany, Russia, Switzerland, the Netherlands, Norway, Sweden and Denmark, the European countries that save most and so have the money to spend their fellows out of the crisis.
Bookkeepers are still crunching the numbers of 2012. So, we have to rely on one year old patterns that point in the direction of an enormous shortage of aggregate demand worldwide. The biggest market of the world is divided. In 2011 the current account deficit of the EU-27 was € 66.600 million, corresponding to 0,5% of gross domestic product (GDP).

The balance of payments records all economic transactions between resident and non-resident entities during a given period. If a country or a group of countries runs a deficit, this means that the country(s) involved have spent too much in relation to what has been produced (GDP). Indeed, within the EU we have got big spenders like Greece and Italy, but big savers too, like Germany and the Netherlands. In relative terms the Netherlands are champions in saving. They are running a current account surplus of 8,7% of growth domestic product, thanks to cheap workers. Since 1982 Dutch real wages have been frozen. As a matter of fact they shrunk a bit, while labour-productivity (gdp per full time employee) keeps on growing. As a consequence labor costs per unit of production are much lower than in Germany. Germany however has cut costs as well and it has pushed through big reforms.

In the old system, before the introduction of the euro fourteen years ago, this would have led to a currency revaluation in Germany and the low lands at the sea. Such a revaluation makes foreign products and services cheaper and makes exportation much harder. That monetary instrument doesn’t exist anymore for the seventeen euro-countries. The tensions have been replaced from the financial markets to the real economy. The ‘money voile’ has been removed and the whole system of saving and spending lies naked before us.

France for example has resorted to public spending and debt. Even as other EU-countries have curbed the reach of the state, it has grown in France to consume almost 57% of GDP, the highest share in Euroland. Because of the failure to balance a single budget since 1981, public debt has risen from 22% of gdp then to over 90% now. France is splashing through deep shit. Rigid labour and product markets, a lot of red tape, super high taxes and Euroland’s heaviest social charges on payrolls, are digging a big canyon between France and the other Mediterranean countries on one side and the North-Western countries (Germany, Sweden, the Netherlands) on the other.

In hard times like these, institutions like EU and euro are real blessings. The sum of seventeen small, open economies with the same currency – the euro – is a large ‘closed economy’ with 332 million people (2009) and a GDP per capita of € 37.575. A closed economy hasn’t much foreign trade. Two-third of products and services that have been bought by Eurolanders are also supplied by ‘Eurolanders’. If in such an economy wages and/or government spending rise, two of every three euro’s spent, flow into the pockets of fellow countrymen. If they spend it, again, only one-third of the money leaks to other countries, et cetera.

If the value of the euro in relation to the British pound, the US$, the yen and the roebel changes, the consequences for Euroland are relatively small. The U.S. speculated on this insight for decades. They structurally spent too much. Live now, pay later, is the slogan that suits Americans most of all. Another blessing for the economy: not every country pays goods and services with dud cheques. Some countries run deficits, some countries run surpluses.

Worldwide China has the biggest surplus on the current account of their balance of payments. Next ranking (2011, US$) shows who are most capable of giving world trade a positive impulse by investing and consuming more:
1. China, $ 201,7 billion
2. Germany, $ 188,6 billion
3. Saudie Arabia $ 144,2 billion
4. Japon $ 120,5 billion
5. Russia $ 101,3 billion
6. Switzerland $ 85,3 billion
7. Netherlands $ 76,7 billion

Together these countries have the power to lift the whole world economy, but they don’t use it – yet. This topic is not on the agenda of politicians and bankers. Their short-sightedness and lack of memory and imagination hurt too many people unnecessarily long.

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