Advanced Stock Markets Are Now Totally Drug Addict

Amid debates on whether recent weeks’ sell off in advanced economies stock markets was a correction or start of a new collapse, picture of world’s top bourses Tuesday clearly indicated that these developed markets now turned totally addicted to stimulus money, just like a drug addict desperately needs heroin.

Banks and shares in peripheral countries led a European rally on Tuesday after media reports claiming that the European Central Bank (ECB) is considering buying corporate bonds to revive the region's economy.

The purchases, which the news reports said could be approved in December and start early next year, are seen as helping banks, especially in struggling southern European countries, free up more of their balance sheet for lending.

The Euro STOXX banking index rose 3.3%, with the biggest gains seen in Greek, Italian and French banks.

Tuesday, European investors were as happy as a drug addict who finally found his heroine. The ECB signaled that it would give the desperately needed easy stimulus money or heroine of the struggling European economy. Before this month dominant consideration was Germany’s manufacturing economy was strong but peripheral countries were weak. However, latest set of economic data indicated that Germany was also slowing down and Europe was on the brink of a new recession or even deflation. So the ultimate remedy is to apply to the lender of last resort or the ECB and make it print paper money out of thin air again!

Elsewhere, Japanese stocks fell Tuesday, with the market latching on to comments from the welfare minister on the country's public pension fund. Over the weekend, media reported that the $1.2 trillion GPIF would likely raise its allocation for domestic stocks to about 25%, a bit more than market expectations of around 20%.

Minister Yasuhisa Shizoaki, responsible for the GPIF, said on Tuesday that he did not know anything about media reports, disappointing investors who had hoped he might confirm such reports.

Let’s summarize situation in Europe and Japan: One drug addict finds hope for new shot of heroin on the other hand another one is disappointed that he will not get the amount of shot as much as he expected.

'Money for Injections' from www.tOrange.us 

This work is licensed under a Creative Commons Attribution 4.0 International License.

Finally, the US stocks rallied on Tuesday, with the S&P 500 on track for a fourth straight session of gains. Media says that American markets were boosted by strong corporate results. If you really believe that the US stock market is not moving according to the more than $3 trillion heroin injection or ‘golden shot’ since 2008 but economic realizations; that means you also need a drug. Here is your drug from Mike Maloney: A video clearly indicating that the US stocks move completely parallel to easy stimulus money: https://www.youtube.com/watch?v=T5JcmpN2mrA&feature=youtu.be&a

Due structural problems like inefficient and excessive source utilization, aging populations, centralization, bureaucratization, nuclear family breaking up, alienation, depression and etc. advanced or matured, old money-industry economies are no longer able to maintain their manufacturing industries in a productive way.

Advanced or developed economies are money based or capitalist economies which organize production with money. Real rulers of these economies are people who control the main production organizer or money or big capital. As the system reached its natural limits rulers corrupted money and invented fiat paper currencies which are not backed by any tangible assets like gold to keep the economies going and more importantly to maintain their ruling positions. 

You can take natural substances and make drugs from them and have joyful time with this and forget your real problems. Rulers of money economies took natural money or gold and corrupted it and produced fiat currencies, a kind of drug for economies. They covered real issues and gave unsustainable entertainment to people. However, now both rulers and public became addicted to this drug. Everybody knows what will be the end of a person who denies his/her real problems and try to live life with drugs!

Dr FED can not Exorcise the Deflation Ghost

The major central banks of the world have fought a war against the deflation ghost which has been bothering the oldest money-based industrialized economies of the globe since 2008 Financial Crisis.  

Major central banks afraid deflation too much cause paying government debts in an environment where prices, earnings and of course tax revenues are falling is very hard. Deflation increases the real value of public debt.

That’s why especially the American central bank FED and Japanese central bank BOJ are targeting to induce inflation. Inflation causes real value of debt to fall and makes it easier for the government to pay back.

"Saintfrancisborgia exorcism" by User Gerald Farinas - Licensed under Public domain via Wikimedia Commons

Due structural problems in old money-industry economies like inefficient and excessive source utilization, debt burdens amounted to unbelievable levels especially after 2008. And more importantly, already high ‘public debt to GDP ratios’ have continuously increased in all advanced economies since 2008. To make the matters worse, the IMF forecasts that except Germany led Europe debt to GDP ratios will keep rising for developed countries even until 2018.

If we consider that interest rates are expected to rise again in the US soon and push cost of debt up further, the situation is unsustainable for the US to repay debts and maintain the reserve currency position of the US dollar.

Amid these conditions, today bad news came on the inflation side for Dr. FED who is already trying to exorcise the deflation ghost with dropping trillions of dollars from helicopters. The US consumer prices fell for the first time in nearly 1-1/2 years in August. The CPI increased 1.7% in the 12 months through August after rising 2% in July. This is not good for Dr. FED who targets 2% inflation because the main reason for the fall in prices is decreasing oil costs and global oil prices are going down due cooling Chinese economy.

As general structural deflation in the developed countries leaves no room for Chinese exports, red dragon’s economy slows down and this lowers demand for oil and creates another circle of deflation. O ooo!! Major central banks of the world desperately print trillions of dollars paper money to cover the structural deflation in developed economies but since 2008 they are unsuccessful to reverse this trend and create sufficient inflation to get rid of unbearable debt burdens.

It seems, major central banks would need to take new measures in order to avoid this new wave of deflation and prevent collapse of their money supplies. Recently, Eurozone and China announced that they will print money. Under Abe administration, Japan started the largest money creating operation in the history. However, it would not be enough. I guess both the FED and the BOJ could also go for new extra measures.

No Recovery in the Developed World’s Debt Problem

Economists still discuss whether money printing policies are successful in creating real economic recovery at the oldest money-based industrialized societies or the developed world. The US FED is tracing growth, unemployment and inflation to decide if the economy is back on track.

However, the developed world (Europe, the US, Japan and Russia) must initially improve another indicator to ensure the sustainable growth: ‘Debt to GDP Ratio’.

If a country’s government debt compared to its annual national income or GDP is increasing and if the interest rates are expected to increase in the near future public finance of such an economy is not sustainable. And more importantly confidence in the national currency of such an economy would be in jeopardy.

Debt to GDP ratio of the US had risen from 50% levels in 1990s to 60% levels before the 2008 Financial Crisis. At the end of 2008 it increased to 64.8%. In 2009 it jumped to 76% and continued climbing rapidly. Despite all recovery talks, it reached 87.1% in 2010, 95.2% in 2011, 99.4% in 2012 and 100.1% in 2013! In 2014, the problem persisted. America’s debt to GDP ratio is expected to hit 101.53%. (Source: US Bureau of Public Debt via tradingeconomics.com; http://bit.ly/1s3jIM9)

"Usa national debt 20 April 2012" by Valugi - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - 

The picture is almost the same for Europe. Here are ‘annual debt to GDP ratios’ for Eurozone countries:

2008: 66.2%; 2009: 70.1%; 2010: 80%; 2011: 85.5%; 2012: 87.4%; 2013: 90.7%; 2014: 92.6% (estimated). (Source: EUROSTAT via tradingeconomics.com http://bit.ly/1s9rwpO)

And this is the situation for Russia:

2008: 8.5%; 2009: 7.9%; 2010: 11%; 2011: 11.04%; 2012: 11.71%; 2013: 12.74%; 2014: 13.41% (estimated). (Source: Federal State Statistics Service via tradingeconomics.com http://bit.ly/1y6qymA)

Japan has the worst case on this issue of the entire world:

2008: 167%; 2009: 174.1%; 2010: 194.1%; 2011: 200%; 2012: 211.7%; 2013: 218.8%; 2014: 227.2% (estimated). (Source: Ministry of Finance via tradingeconomics.com http://bit.ly/1qB9r4G)

When we are talking on government debts of developed countries the figures are unimaginable, tens of trillions of dollars. And as we saw above, rates of government debt to total annual output of the nation have already exceeded normal levels. They are fluctuating around 90%, 100% and 200% . But the worst fact is in all developed societies debt to GDP ratios are rapidly climbing!

And to make the matters worse despite trillion dollars of money printing operations to stimulate economies, the so called recoveries are not expected to reverse this tendency in the future even for the most optimistic predictions. An IMF study indicates that except Germany led Europe debt to GDP ratios of all developed countries (and the UK separately from the Europe) will be higher in 2018 when compared to figures today. (http://bbc.in/1BFXSiF, Table: Debt as a % of GDP).

If you can not ensure a sustainable path to reduce your giant debt mountains; it is not important how much so called ‘recovery’ or economic growth you created or how many people you employed to low-wage or part-time jobs to reduce unemployment rate.

If especially the FED can not lower debt to GDP ratio in an environment where everybody is expecting the end of zero-interest-rate policies; people might lose confidence in the US dollar, the global reserve currency and such an event might trigger the fall of current international monetary system. 

Why Gold Prices Fall Despite European Money Printing?

Last week, the European Central Bank (ECB) surprisingly lowered all its interest rates and announced that it will print money. Following the news the US dollar started to appreciate against euro and all other currencies and commodities including gold.

Gold it is an alternative for paper and fiat currencies. So, if the ECB will provide more euros and expand the paper money supply gold must have gained value. However, it significantly lost value falling from around 1300 dollars to 1250 dollars levels.

"Euro coins and banknotes" by Avij (talk · contribs) - Own work. Licensed under Public domain via Wikimedia Commons

Attributing this fall in gold prices to easing geopolitical concerns is nonsense. I do not think that markets ever really priced a war between the NATO and Russia. If it was the case gold would have skyrocketed to 10 thousand dollars if we consider possible destruction that could be created with such a war. If the war was never priced so a ceasefire in Ukraine has no real impact on gold prices.

The fall of gold prices against expectations for abundance of euros indicates and underlines a special feature of the yellow metal. The gold is not only an alternative for paper and fiat currencies; more importantly it is an alternative for the global reserve currency.

A reserve currency is the kind of money that is held in significant quantities by governments and institutions as part of their foreign exchange reserves for using in international transactions. With the reserve currency you can purchase imports and borrow in international markets more cheaply than people who do not use a reserve currency because you would not need to exchange the reserve currency to do so.

"Gold Bars" by Agnico-Eagle - Agnico-Eagle Mines Limited. Licensed under Creative Commons Zero, Public Domain Dedication via Wikimedia Commons

Today the world is generally using the US dollar as the global reserve currency. The other alternative reserve monies are euro and gold. Recently, sanctions against Iran showed the world that gold is a very effective reserve currency in emergency situations. When the sanctions blocked Iran’s access to international monetary markets and prevented its exports and imports; Tehran started to use gold for international trade.

So when euro depreciates it pushes the dollar up and as the dollar is the primary reserve currency of the world this upwards move of the greenback presses down gold and also euro further; as the alternative reserve currencies.

In the coming months we can expect the developing countries’ central banks to continue buying gold from cheap prices as they are trying to increase their gold holdings against possible ugly consequences of huge money printing experiments of the developed world. We can also expect that the US will take new measures to depreciate dollar, because strong dollar will hurt American exports and undermine an already fragile and debated economic recovery. Most importantly the US needs a weak national currency in order to create inflation and melt the giant national debt mountain. The problem is all the other developed money-based industrialized nations, especially Europeans and Japanese, need the same thing.