Zeno’s Recovery – Looking forward with fury to 2011


by David Malone

Well here we are in a second successive year of Zeno’s Recovery. The recovery that never ends but never gets anywhere either.

In accordance with Zeno’s rules of paradox, no news will be allowed that is not positive, good news will be exaggerated and bad news will be treated as if it were good news. Every report on television, radio and in the newspapers will be about how some indicator or other is on its way up. And yet to those not staggered with optimism, it will appear, as it always does in nightmares, that for all the struggling and sacrificing, we will never seem to move from where we started. The people of Ireland already know how bleak this feels.

Here are some of the reasons why I do not believe we are in a recovery. I know I risk becoming a ridiculous figure, the man who refuses to see the dawn even as it breaks. But I see no dawn.

What exactly has turned around in the Land of the Free?

Housing prices have not risen. They are going to fall in fact, as foreclosures and bank sales rise like a stealthy tide. And this despite the on going legal debacle concerning fraudulent foreclosures and  even more fraudulent securitizations.

Unemployment has not fallen at all. The narrow definition, U3, still stands on the cusp of 10%. While the true misery measure, U6, stands like the stone rebuke that it is, at 17%.

The ONE and ONLY thing that has recovered is the stock market. Breathless headlines ‘revealed’ that US markets are now back to ‘Pre-Lehman’s levels’. So how can I possible doubt the robustness of the recovery?

Easy! There is still the unspoken assumption that these stock levels are a proxy for general well being and broad recovery. This IS NOT TRUE. Who owns all these stocks?

I doubt you own any. Because 90.3% of ALL the stocks, shares and Mutual fund ownership  (Which are large, pooled investment funds) are owned by just 10% of Americans. 50.9% of the stocks and shares are owned by a single, golden ONE PERCENT. That ONE PERCENT of the families of America runs, owns or works at Wall Street’s Banks, America’s largest corporations, including its largest, Congress inc. (Thanks to Rich for the link).

The same 10% who own the wealth, the stocks, the bonds, the banks, and the companies, ALSO run the government and sit in the courts. Which means that 90% of the rise in the stock markets enriches the same 10% who already own everything anyway. 90% of the stock market rally does NOT benefit ANYONE else in America.

Is it a coincidence that the people who engineered the ‘recovery’ with its miraculous stock market recovery turn out to be the people who also own all the stocks?

What this means is that watching the stock market tells you simply how fast the super wealthy are becoming even more super wealthy, how quickly they are leaving us behind. It tells you nothing at all about the people of America and the economic distress in which they live. A ‘recovery’ based solely upon a rise in the stock markets while wages and home prices remain collapsed is a recovery for the very few AT THE EXPENSE of the rest.

And that is exactly what we have had so far.

Company share prices have ‘recovered’ to pre-Lehman’s levels but wages for ordinary people have not shared in this recovery. Companies have not rehired. Production has not gone up. Exports have not jumped to pre-Lehman’s levels. Nothing has moved, except the prices of the shares traded back and forth between the banks of the rich.

A little over a year ago at the end of 3Q of ’09 news was trumpeted out of Japan, that 3Q growth had reached 4.8%. A fantastic figure for the world’s financial bulimic sumo. Was this finally the end of the two decade nightmare of alternatively helplessly gorging itself on trillions of yen in stimulus, only to violently puke the lot back up as it refused to consume or grow?

No, it wasn’t. It was a lie. Another one. From the staggering 4.8% it was ‘revised’ down to 1.3%. In fact growth in 3Q turned out to be just 0.3% which gives 1.3% as an annualized rate.

Since that ignominious admission that there had been none of claimed growth, things have only got worse for Japan. Japan now has debts of 225% of its GDP. At the same time the cost of that debt, as a percentage of its TAX Revenue is just short of 60%.

So Japan’s recovery is to have very low, if any growth, with debts over over twice its GDP and servicing costs which take nearly 60% of it’s entire tax take. And all that, is only the Yakuza’s smile. The bad news is, in my opinion, terminal.

Just after Christmas Japan’s cabinet approved a new budget which plans to reign in government borrowing aiming to reduce it to ONLY 200%. And they will do this by SPENDING MORE than last year. In fact Japan’s borrowing WILL, same as last year, exceed tax revenue by 41 Trillion Yen.

Japan’s pathetic leadership will spend more, save nothing, borrow 41 trillion more than they take in taxes, spend 60% of what they do take paying the debts they have accumulated so far, before rounding off another stellar year of recovery, with more debt than they began with.

Japan is lost. Japan will only pull off this slow suicide by raiding 7 trillion yen in one-time pots of money hitherto unnoticed –  such as money accumulated by the railways.

This plan is a monument to lies and failure. It is without a shred of courage and it dishonours its own people. Frankly, it soils the Japanese.

That is their plan. A plan which still depends on selling huge amounts of debt. And therein lies the  killer problem. Till now Japan has sold its debt to its own people via their pension plans. The problem is those pension plans, like the people in them, are now out of money.  Not only that but the largest pension plans as well as smaller investors are now moving their buying abroad. So far the move has been slow. But all landslides begin slowly.  Without domestic buyers for their debt, willing, as they have be till now, to buy the debt at a third of the interantional market rate,  Japan cannot and will not survive.

I believe that 2011 will be the end for Japan. Domestic buyers will not buy enough. Japan will have to offer its bonds on the open market. It’s costs will triple. The market will also know that next year there will be no little pots of money to raid. 2011 is Japan’s last year to find the courage and new leaders it has lacked for more than 20 years. If it doesn’t then it is going to implode.

Hungary and friends.

In December, Hungary’s debt was downgraded by Fitch to ‘BBB-‘ with a negative outlook, which is just one grade above junk. This on ‘worries’ that the government does not intend to cut its debts as fast as it has said it would in discussion with the IMF and EC.  And so it won’t.  Hungary has no hope of cutting its debts as the IMF would like it too, in large part, because it is not growing at the fantasy rates all and sundry told themselves it would. Hungary, like its neighbors Romanian and Bulgaria is sinking.

And the other, compounding reason, if you’ll pardon the horrid pun, Hungary is doomed is because the Swiss franc is gaining value against every currency. The Swiss franc is even gaining against the dollar as a safe haven investment.  So for the Hungarians who borrowed and owe their mortgages in Swiss Francs but have to earn and pay in Florints, their debts are growing and there is NOTHING they can do about it.

And do you remember who owns over a third of Hungary’s banking sector? Greece. So as losses and defaults grow in Hungary a chunk of those losses will be headed to Greek banks to deal with. Another part of the losses from Hungary, as well as Romania and Bulgaria. will pass to Bank Austria and its luckily owner UniCredit.

I also expect that this year will also mark the beginnings of trouble of countries who have so far weathered this crisis better, such as Poland who also has large mortgage debts valued in Swiss Francs..

China is still trying to reign in the property and banking bubble it has let grow but somehow do it without popping the bubble.  Good luck. They also need to bring down inflation which is growing and fast.  So far the central authorities have failed to reign in anything at all. So the central government has now raised the bank rate. Will this do what all other efforts have failed to do?  Who knows.  What I am more interested in is the effect of the uncertainly on Australia and Canada. IF, and it is a bog if, China does in any way manage to stem the flow of hot money pouring out of China looking to buy properties in Canada and Australia, then this will have dire consequences for both those nations. Chinese investment has been no small part of their ability to keep their property bubbles going.

The first real warning signs have begun to flash for Australia, Australian banks do not and cannot fund their lending from domestic deposits and interbank lending. Just like those in Ireland and the UK used to do, Australian banks have become dependant on foreign, often non-bank funding for their mortgage lending. Australia as a whole now owes foreign investors 352 billion Australian dollars. Which is 27% of  Australia’s entire economic output.

And for the first time some of those foreign investors are sounding warnings.

This is from the Australian financial press,

Gerard Fitzpatrick, global fixed income portfolio manager for Russell Investments, said he was increasingly cautious about lending to Australian banks.

Speaking from London last week, he cited the recent catastrophe in Ireland, where the house price bubble effectively broke the banks.

“I’m not saying Australia is the same as Ireland, but there are definitely similarities,” Mr Fitzpatrick said.

“You’ve had a booming housing sector and rapidly increased lending by banks. The two situations have enough in common for bond investors to consider the consequences for the Australian housing market – and the banks that are supporting it.”

When you are totally dependant for day to day solvency on suppliers of short term funding and those suppliers even START to mutter about feeling ‘increasingly cautious’ about lending to you, then you are one step away from becoming Northern Rock, Anglo Irish or Depfa.

It is my feeling that the property markets on Canada’s west coast as as vulnerable as Australia’s market.  It is only the blanket guarantee of the Canadian government which has kept the lid on the whole thing.

Portugal and Italy.

I think Italy will find itself slipping into company with Portugal partly as municipal debts surface and partly as UniCredit being to suffer as I think it is going to do this year. UniCredit’s woes will be partly those of Italy as it’s ability to stay above the bond market carnage ends and is drawn in to its own funding crisis.  

And it will partly be UniCredit’s very own crisis. One made in the East, in it subsidiary, Bank Austria and in the West at another subsidiary, Pioneer. Some potentially very damaging questions have already been asked in the Austrian Parliament about UniCredit’s actions. The questions are not yet, I don’t think, public, but may become so. What is sure, is that those asking them, and the suspicions underlying them will NOT go away. They will grow and fester like an infection from dirty splinter

Great Britain.
This is the year the reality of our situation beings to pierce the fog of government and city lies which has blended so well with a self induced chemical defence of chronic drunkenness. 2011 is when GB will taste the bitterness and pain of sobering up.

This year there will be a wave of crime some of it not so petty. That may sound trifling but it will unsettle the inner cities and the towns in a way the Tories are not ready for. The cause of the crime wave will be the new policy of making people report regularly for work duties or lose their benefits. There is an small army of Heroin addicts and chronic alcoholics who cannot and will not report for work, who will therefore lose their benefits and will, in all likelihood turn to petty crime as soon as the cramps kick them hard enough. We have already seen a rise in household thefts in my area, according to local police.

To that wave of misery add a wave of  homelessness. 2011 will be a year of unrelenting cruelty when it comes to people losing their jobs and income, and shortly thereafter facing losing their house as well.  I expect the second half of this year to slowly force a wave of families out of their homes into homelessness. The problem will come when local authorities reveal that they just do not have the money to rehouse them.

These are some of the reasons I see no dawn of a better future.  

I see only a cold growing fury spreading like a disease among the shafted and despised. For anger is the one natural product of recession which is indeed limitless and does increase when nothing but lies and misery are on offer.



David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: http://www.debtgeneration.org/index.php