A Melman Minute
| By | Leonard Melman |
|---|
It is time, really time, to put on our collective thinking caps and ask ourselves the question of whether the much--ballyhooed economic recovery is everything which is suggested by commentary forthcoming from those who would wish it were truly so. For if it is not, if the recovery is anaemic, pathetic or even mostly non-existent, that would suggest a period ahead of monumental, destabilizing monetary stimulation of a historic nature.
It is either one or the other. From our point of view, there is little middle ground, so to speak.
As is normally the case in my view, evaluating the question on the simplest possible terms is an excellent way to search for a valid answer and, in this case, one figure stands out as a stark contradiction to the optimistic case.
A CONTINUING FLOOD OF GOVERNMENT DEBT
In our opinion, as the American election of 2014 approaches, the White House is engaged in a deliberate attempt to 'prove' that the President's policies are working, that the economy is improving quite rapidly, that job creation is progressing apace and that America should continue along the path which has been chosen by the Administration.
Regrettably, at least in terms of their argument, one figure keeps getting in the way.
If their rose-coloured-glasses commentary was indeed accurate, then it would stand to reason that along with all that prosperity, the government should be seeing increasing tax revenues, decreasing expenditures as welfare rolls diminishment and - after five years in office - it would seem reasonable that the path should have been turned toward government surpluses.
However, our important figure simply does not confirm that argument. According to the US Treasury, the "Gross Public Debt" of the USA stood at $16.692 trillion one year ago and, as of this past Friday, it now stands at $17.467 trillion - an INCREASE of 775 billion dollars in just the past year alone.
I for one would love to hear a cogent explanation of just how the debt could still be skyrocketing ahead when all the American public hears from the Administration is a parade of ultra-positive information.
In the meantime, gold continues to move higher this morning with the annual gain now totalling over $200 (see chart), perhaps, we might suggest, on the basis that debt, deficits and money creation appear likely to continue at a high rate into the foreseeable future.
PERSONAL DEBT ALSO ON THE RISE
One of the advantages of having spent the early phase of my working years in consumer credit management is that I was able to learn some 'real world' lessons. One of them was that there was no substitute for repaying debt in a timely manner if a road toward fiscal achievement was to be followed. And, it was important to understand, the funds for that debt repayment, to be effective, had to come from current earnings or other sources of true investment income.
Somehow, that lesson is not being learned in today's time frame by either individuals or governments. Governments, in fact, seldom even think about actual repayment of debt, but rather when they do pay off debt at all, it is always from newly-borrowed money. Regrettably, many individuals appear to be learning the same lesson.
According to USA government figures, the amount of instalment debt outstanding at the end of January 2014 was $3.112 trillion - a gain of $331 billion - or 11.92% from the year-earlier figure. It appears, then, that the average consumer is doing even worse than his/her government as government debt increased by 'only' 4.64% during the same period.
Clearly, if there is any growth in consumer activity ongoing in America, it is not coming from sustainable earnings or increasing investment assets, but rather from the acquisition of new debt, which, by definition represents a drain against future earnings.
In our opinion, this represents a growing future difficulty, one which could sharply diminish genuine economic activity in years to come - requiring even further increments of government stimulation.
WHITHER CHINA?
One of the great questions in the present economic world is, "just how solid is the current performance of the Chinese economy?" This question is of more than just academic interest, but rather the rate of growth of the Chinese economy is a vital component of many international economic considerations, not the least being the projected demand for base and precious metals going forward.
With that in mind, we offer thanks to the Los Angeles Times for a thought-provoking review of several items of Chinese economic data - and they don't make optimistic reading. While we are inherently suspicious of virtually all government economic statistics, it is the unanimity of these data segments - all pointing toward future problems - that we find impressive.
In short, the LAT article points out that:
The Purchasing Managers' Index of Manufacturing Activity just dropped to an eight-month low.
Exports plunged by 18% during February.
Consumer and Producer price indexes both declined last month with Producer Prices falling into actual disinflation readings.
Both total credit and total bank loans declined sharply last month.
Industrial Production growth rates declined from 9.6% in December 2013 to 8.6% for the January-February 2014 period.
Fixed Asset Investment growth also slowed by a similar amount this past reporting period.
Retail Sales growth slowed from 13.6% in December to 11.8% for January/February. It had been as high as 20% in early 2011.
Collectively, this data would appear to suggest a decline in Chinese economic performance. If that is the true case, then we would suggest that further stimulative policies will be adopted in several economically advanced nations, with the attendant growth in deficits, debt and money creation.
As of 8:15 AP PDT, financial markets in Canada and the USA are both little changed with the Dow Industrials slightly lower while the TSX Index is ahead by a minuscule five points. Precious metals are once again sharply higher with gold up by a dozen dollars to near $1,385 while silver has gained about 40 cents to near $21.65 per ounce. Base metals are a bit higher on balance while mining share indexes have gained about one percent so far today.
In other markets, the US Dollar Index is down by another 25 basis points this morning to 79.39, the lowest level in several months. As indicated on the accompanying chart, the decline in the DX Index appears to be gathering some strength. Crude Oil is up by 60 cents to $98.80 per barrel and the TYX Index of rates on US Treasury 30-yer bonds is down by 23 basis points to 3.578%.
All quotes US$ unless otherwise indicated.