Balance sheet recovery alone not enough

When it comes to the question of whether globally the economy is on the recovery path or not and/or if it is heading for a double dip recession or not, the top dogs of the investment world and most respected analysts seem to be more deeply divided than ever. One thing is sure, however, if recovery remains only on the balance sheets of investors and institutions and does not shorten unemployment lines, the world is heading for troubled times.

At the end of last week it was reported by Business24 that five investment groups, which  manage in the order of $1 700 billion investment funds, all reported that the global economy is on the mend and that a double dip recession is unlikely. Among these gurus was Warren Buffet and his Berkshire Hathaway group.

At the same time the Daily Telegraph in London reported that George Soros’ fund, which has approximately $25 billion under management has reduced its equity investments by 42% to $5.1 billion by the end of June – down form $8.8 billion at the end of March.

Interestingly, of those equities that do remain in the funds’ holdings the largest investment is in a gold exchange traded fund. At the same time investments in bellwether stocks (widely believed to be indicators of the trend in stock markets or sectors) such as Wal-Mart, JP Morgan Chase and Pfizer were cut by 99%, 97% and 95% respectively.

Although Soros and his fund did not disclosed where the funds have gone, it is speculated that they have been shifted into government bonds, as well as into commodities and other safe havens.

The message seems to be clear, there is no great confidence in a recovery in manufacturing or consumer spending any time soon. This also implies that things are not about to turn around soon for the man in the street in most major economies or that there will be an improvement in the employment figures.

A Bloomberg opinion piece put out last week carried the headline: “Debt Virus Spreads During Make-Believe Recovery.” It warned that the notion that the euro area is growing again, that its banking system has survived its stress test and that the crisis appears to be over, should not be believed.”

The piece goes on to state “… the euro area remains as dangerously imbalanced as always. Take a look at those growth figures. In the second quarter, German gross domestic product grew 2.2%. Other countries didn’t do nearly as well. Greece’s economy shrank 1.5% while Spain registered just 0.2% growth.

“The debt crisis has even helped Germany by weakening the euro, thereby strengthening its exports. It has hardly helped nations like Greece because they don’t export much. Instead, the euro area is more lopsided. Germans are getting wealthier, yet they are being forced to subsidise Greeks who are getting poorer. That won’t be sustainable for long”; and “Europe’s sovereign-debt crisis was always going to be a drawn-out affair. Lulls in the storm are to be expected. Crisis finished? It’s only just getting started.”

Credit ratings agency Moody’s last week also said the world had changed since Europe’s debt crisis.

“None of the large sovereign states can still assume it is credit-worthy. The burden of proof now falls on governments;” and “The current crisis differs starkly from the one-off debt spikes after the Second World War, when young economies were able to outgrow the debt burden. This time the threat lies ahead as the aging crisis drives up pension and health costs on a static tax base. While the current stock of debt is large, it is dwarfed by the accumulations of future liabilities if policies do not change.”

On the other side of the Atlantic, in the US, there is no problem with aging since the population is still growing. There is also, however, for other reasons great scepticism  about a turnaround for ordinary Americans and the productive, job-creating side of the economy.

Faith in a policy that largely focuses on interventions to ensure that the money supply does not come under threat and is aimed at keeping banks and other financial institutions afloat is fast dwindling. Fears are growing that the American economy is being “Japanised” in a protracted period of deflation and low economic growth.

These fears were fueled by a policy statement earlier this month that the Federal Reserve would be using income it gets from the mortgage securities that it bought off banks at the time of the financial crisis to buy government treasury bonds. Effectively the Fed will be using the money to buy other debt --  government debt in the form of bonds -- and financing its deficit by printing money.

This, however does not constitute any real stimulus of the economy via investment in productive assets. As one article on Information Clearing House puts it: “...what is most frightening is that it appears as if current monetary policies view Japanese-style economic sclerosis as the best outcome that can be hoped for. The US retail banks are poorly capitalised and unable to lend – but kept in the land of the living dead by a central bank that understands the costs (think great depression) of not doing so.”

Another article states: “Milton Friedman was wrong: money supply does not drive the economy. Spending does. The money must get into the hands of the people who will spend it, which is why the economy runs better at full employment.”

While Greece and Italy have already illustrated to what extent societies with aging populations can be destabilised when the state starts saving on social security spending, it is on the employment front that there could be red lights starting to flash for the US.

Bloomberg reported a top economist as saying that “consumers’ faith in the economic recovery is failing,” and commented that “the job market is slow and volatile, and it’ll be 2013 before we see any semblance of normality in the labour market.”

In Atlanta recently riots threatened when thousands of people were trying to get onto public housing lists and the general mood is well illustrated by the following reported comment: “When Wall Street is hurting, money’s never a problem. But when the states are on the brink of default and 14 million workers are scrimping to feed their families, there’s not a dime to spare. Explain that to your kids.”

(In a future article we will take a look at the implications of the present state of the global economy for South Africa and the rest of our continent.)