Tough day. The details will be media-inescapable; work on context instead.
U.S. job data for May were poor, and April’s revised so. However, jobs are growing, incomes are rising (a paltry 0.2 percent monthly, but rising), and the National Association of Purchasing Managers’ service index for May arrived at 53.5, a little off from April’s 10-month high but a healthy distance above 50 breakeven.
The U.S. concern is delicate: Until this newest data there had been good reason to hope that the U.S. locomotive could begin to pull the world. Now the chance has risen that global drag may stall us, too. Take heart: That’s a risk, far from a done deal.
The global picture and financial flows have been widely misdescribed — partly from ignorance, partly confusion, partly salespeople trying to rile their herds, and everybody trying to jam a genuinely new situation into old models and experience.
Since the dawn of central banking 135 years ago, the fundamental prescription during an economic meltdown and bank run has been to flood the economy with cash and government guarantees. Since 2007 we have suffered serial bank-on-bank "wholesale" runs, but all-ee same-ee.
The global monetary system has worked to perfection: clearing transactions and currencies, central banks smoothing panic after panic. And those central banks have also deployed the most basic medicine for recovery: Knock interest rates to the floor, and promise to keep them there. Low rates stimulate economies, and over time convince investors that holding cash is stupid, and instead to take risk.
All of that is out the window now. Today.
Start at the beginning: The cash in your wallet is an IOU from a government, and the IOU is as good as that government’s tax revenue versus expenditures over time. "Hard" backing for paper "fiat" currencies — metal, sea shells, whatever — is a primitive and failed means to keep government IOU issuance under control. The painful and unresolved reality: It is up to us. By the 1960s, nearly all Western democracies had begun to borrow instead of resolving fiscal disagreements, and gradually lost their safety margin of revenue versus debt service.
There was no telling who or what accident would snap an overstretched system, and it has turned out to be the misbegotten euro. This week we see the endgame of meltdown-fighting. The European Central Bank has injected several trillion euros into the European banking system — which is still open, no domino closings — but the cash has run through the 17-nation euro zone like grass through a goose.
To escape repayment of IOUs in new lira, peseta and francs, euro outrunners have today bid the German 2-year to a negative yield, hoping for repayment in deutschmarks. They’ve also fled to U.S. 10-year Treasurys — not as an investment at 1.46 percent today, but a liquid place of safety. Other safe havens include the bonds and banks of Denmark, Norway, Sweden, the U.K. — anywhere to get out of the lunatic asylum.
The hard-money boys have told us forever that the result of European Central Bank liquidity would be inflation. Exactly the opposite is happening. Inflation is falling throughout Europe.
Zero-percent interest rates that were to drive investors from cash have been unable to stop a stampede to cash. Cries for government guarantees, Germany or somebody, or for more government spending — desperate to continue the failed 50-year game — cannot comprehend the result of faith lost in revenue adequate to pay bills.
The euro is toast, no solution but to break up and let local currencies find levels allowing growth. A fantastic destruction of wealth is under way, inevitable, and social stability at risk.
Elsewhere … embrace the lesson! Do not waste Europe’s disaster. Here, and in China, and in the emerging world, we still have time.
All face the same chore: Focus, pull together, and restructure away from any impediment to economic growth. Drop every cherished notion — from China’s state industries, to India’s "license Raj," to U.S. regulatory paralysis (all remarkably close cousins).
If it’s not productive, drop it — no more "A small price to pay for protecting (fill in the blank)." Bust up profiteering cartels like health care and higher education. Live within our means, and be competitive in the world, or be Europe.
