EU Reeling From Yellow Vest Protests. What Happens if There Is a Debt Crisis?
There is a lot of talk about which economic bubble will burst first and burst the worst (sounds like a gangsta rap song, no?)
The stock market, real estate, luxury goods, corporate debt and government bond bubbles, and other lesser bubbles, all jockey for the titles. Its the “Everything Bubble” for good reason.
The “good reason” is: the 1% owns everything of high value, so if Western governments make it their policy to inflate those valuations even higher, then the 1% regains everything they lost in 2008. Welcome to Western Liberal Democracy – if you have a seat in the House of Lords Im sure youre not suffering too badly.
Because of that “good reason” I listed all of these bubbles are worse now than in 2008. Nothing was learned and nothing was delivered: I am not a doomsdayer, but these kind of facts make me write that Great Recession II (Great Depression II?) is around the corner.
However, not all bubbles are created equal:
The luxury goods bubble, for example. Its mildly interesting, from a sensational news aspect, that the most expensive bottle of wine is now worth $558,000…but the luxury goods market is a minuscule part of every nations “real” economy, excepting France, Italy and Switzerland. Back in 2008 a half-million dollars set the record for largest lot of wine ever – 27 bottles – so these stories only prove the existence huge asset inflation (bubbles) – 1/27th in the area of wine sales.
The stock market bubble is also mainly a rich-persons problem – we only hear about it so very often because…the rich own the media in the West, and the coverage thus reflects their interests. Yes, 52% of Americans own stock, because its a huge part (stupidly, rapaciously) of the American private pension system, but only 18% own stock directly and can buy and sell at will. We all know that stocks no longer have any correlation to a companys actual performance and prospects; those really paying attention also know that the Great Recessions bailout money has been used for stock buybacks, which raise the stock price. That bubble is ending, too: taxpayer-funded stock buybacks were higher than ever in 2018 and yet produced the worst market results since 2008.
This now-failing tactic of buybacks is the source of the “corporate debt bubble”. The stock market bubbles bursting is not that important to the everyday person, no matter how much media coverage will be devoted to it – the real economy will not not sink because of it, no matter how much less your 401k pension is now worth. The relatedcorporate debt bubble is far more impactful: instead of using that cheaply-borrowed money from the government to hire or for RnD, corporations are thus not prepared for capitalisms next inevitable crisis, which translates into layoffs, which translates into a huge “real economy” hit as workers are not buying lunch, paying rent or buying decidedly non-luxurious but still-necessary goods.
The real estate bubble affects many more people, and not just in the construction market. Just over 50% of Germans are homeowners, rising up to 70% as you get in the former Socialist Bloc nations, with the US around 65%. Amazingly, home prices have surpassed the prices in 2008 in the US. But its rarely remembered that houses are only worth what a bank will loan you to pay for them. Banks are getting money from governments cheaply, but instead of “real economy” investments they inflate houses (which they own) with incorrect valuations. When credit is so low that borrowing is near free, why not pay yourself more? So that means more dumb loans have been dangled and signed. When this bubble bursts it will hurt but it wont bring the entire economy to a total halt.
(Sidebar: As a daily journalist who deals with housing activists regularly, let me pass this on to you – there are few mass problems easier for the government to fix than housing. Housing oversupply in the US is back to 2007 levels? Why arent the homeless and poorly-housed rejoicing? Because in the West housing policy is controlled by real estate speculators, lenders and landlords – not dwellers/citizens. Your country lacks (mainly low-cost) housing supply (like France and the US)? Again, the stroke of a pen creates a fabulous, real-economy and real quality-of-life-boom for your citizenry. But…not in capitalism. Think China is wrong to build “ghost cities”? I say lay off the propaganda: you are wrong to imagine that construction doesnt move faster than government bureaucracy. Check those ready-made planned towns in 10 years – they always get filled up with Chinese “peasants” eventually.)
The bond bubble, however, is the mother of all bubbles. Thats because the most important actor in any economy is the government.
Lie to yourself about how “the West values a free market” all you want – if a government cannot pay bills & wages or provide necessary services, then the real economy will be crippled. Because so many Western governments run on deficits – which is not to say that all debt is unproductive debt – they have to borrow via bonds.
Cant borrow, like Greece? Then you wind up…like Greece.
It takes a US government shutdown for The “socialism for the losses” New York Times to say what all lower and middle-class people know: government jobs are the best ones. The Times is right: no government jobs/cutbacks, then no more lunches at Rayettas Lunch Box but brown-bagging instead; no jobs for Blacks/Muslims, then its back to their two low-paying choices in private industry, depending on gender – janitor/security or receptionist; austerity cutbacks or shutdown-cutbacks indeed means “three families that would be getting above-average pay” wont get it, with huge consequences on the local and national levels.
So I am not falsely trumpeting the virtue of “big government” when I note that if/when Eurozone governments cannot borrow money via bonds, then 1) they cannot continue zero-interest lending to banks, 2) which means banks cannot fund stock market buybacks to prop up the stock market and also inflate (non-productive) corporate debt, 3) cannot give banks the money for risky and overvalued loans to prop up values in the real estate market, 4) they are not able to create the profits which fuel sales in the luxury goods market.
Government is Mommy and Daddy – where they lead, all the children must follow. It is only the socialist-inspired systems (China, Vietnam, Iran, Cuba, etc.) – which have fundamentally different aims and which fundamentally limit the reach of high finance as well as neoliberal and foreign capitalists – which will be able to buffet the coming storm.
The Eurozone, however, could see total chaos at any moment; France has the Yellow Vests already.
Eurozone: Still the weakest link, but even weaker
I have written extensively about how the Eurozone is far, far weaker economically now than during their Sovereign Debt Crisis in 2012.
Back then, nobody wanted to loan to Eurozone nations like Greece and Ireland, whose balance sheets rocketed to awful expressly because they were laden with banker bailout debt from 2008. Given that Eurozone nations have relinquished the right to print their own money, those countries were up a creek without a paddle. Get a loan or the national economy stops.
But…why loan to many in the Eurozone in 2012? They suffered the 2008 crash PLUS banker bailout debt PLUS they had embarked on the policy of “strangle your national economy to reduce the social safety net and workers rights”, a.k.a. austerity.
The “solution” was Mario Draghis “Whatever it takes” speech, which translated on a practical level to Quantitative Easing, i.e. no-strings attached, near-free taxpayer money to the 1% and high finance in order to stop them from squeezing the national bond markets of the Eurozone as they had started doing. The US and Japan had embarked on QE sooner and more deeply.
This solution steadfastly refuses to inject money into the real economy, which is why Yellow Vests are suffering instead of content.
The first proof of this is that the Eurozone has achieved a Lost Decade of economic growth (average annual growth rate from 2008 to 2017 was just 0.6%.) – which the media never admits but which I detailed – despite 6 years of QE. Money was only injected into the 1%er economy, and the second proof of this is that we now have Real Estate Bubble II, Stock Market Bubble II, Luxury Goods Bubble II, etc. Only Eurozone Government Bond Bubble II has not appeared…because when it does, by definition, all hell will break loose. The government, socialists understand, is the ONLY backstop from disaster – capitalists falsely believe it is the SOURCE of disaster.
Beyond the poor day-to-day policy of QE, there have been no structural policy changes as result of the poor, capitalist-led rules which allowed Sovereign Debt Crisis I to happen in the first place: no mutualization of Eurozone debt, no increased transparency of the EuroGroup, no changes at all. So…of course there will be Sovereign Debt Crisis II!
All this explains, to a time-traveller in 2008, that the 1% has continued to win despite the Great Recession caused by their bad decisions!
The Yellow Vests are there precisely as a result of the guaranteed failure of non-socialist inspired economic policies.
When the Eurozone bond market gets turbulent, its a Yellow Vest rampage – I say, Good
On top of all this practical, governmental failure, the logic, philosophy and history of capitalism dictates Sovereign Debt Crisis II will happen: punk, unpatriotic, heartless high financiers will go back to doing what they do before the European Central Bank began buying them off – squeezing the national bond markets for profit.
“Oh, ECB interest rates are no longer 0%? Then why would we risk our own money to buy your ever-worsening countrys bond? Oh, the ECB wont go below 0%? You mean you wont pay us to buy your bonds? Oh, the ECB cant buy national bonds either, because QE has bought so much (2.5 trillion euros) that its credibility is strained and its legal limits reached? And your nation cant print money either? Well, too bad for your nation, I guess. Germany and the Dutch should be relatively ok, thankfully.”
Furthermore, we also have a generation of young capitalists who have never, ever seen a bear market. Wrap your heads around this perpetual reality of capitalism; they will get their tails handed to them on a platter, and our tails along with them.
To say that I am wrong about why the European Debt Crisis will not get start soon – given the withdrawal of high finance-pampering – is to say that capitalism is not “capitalism” but that it is a centrally-planned, regulated, protective, riches-limiting socialism instead; is to say that high-finance has found morality and wants to make money honestly; is to say that international neoliberal capitalists have rediscovered fraternal patriotism.
The Eurozones QE, after postponements, is now done. It was supposed to be finished in September of 2017, which is why I wrote this 7-part series about it back then, but it was postponed and prolonged with a QE2 until December 2018. The US and Japan have also had multiple rounds of QE.
The Eurozone – the largest macroeconomy in the world and yet also the weakest link the global economy, and which has been significantly weakened by the policies pursued since 2012 and since 2008) – is about to re-enter crisis mode.
Maybe at the first sign of Eurozone Sovereign Debt Bubble II they will announce QE 3, but that would require a changing of their rules – the ECB is not as independent as the US Fed or the Bank of Japan, after all. It is very likely – given the horrifically slow nature of the EUs 18th-century Liberal Democratic system – that the rules will not be changed in time, given the fact that QE 3 would come amid such a very worse economic and bubble situation than QE 1 or QE 2.
And now France has the Yellow Vests: angered, rendered desperate and emboldened by eight years of austerity.
Just imagine the effect any major economic shock and subsequent slowdown will have on the Yellow Vests – what if unemployment goes from 9% to 11%? The Yellow Vests are marchiRead More – Source[contf] [contfnew]