A Little Goosing of the Money Supply and the World is Alright Again

We have pointed out for several months in these pages that the increase in the euro area's true money supply (+8% year-on-year) would likely produce further improvements in PMI data and other measures of economic activity in the euro zone. See for instance our June 5 article Euro-Area PMI Data Improve as Money Supply Growth Accelerates”.

This is not rocket science to be sure, but we have noticed that very few economists actually look at these data. In fact, if they look at monetary developments at all, most of them employ money supply measures that are essentially useless, as they include components that are not money. This is why they are continually 'surprised' when economic data are released.


In recent months the expected improvement in the data has indeed occurred, and now mainstream economists and sell side analysts are falling over each other adjusting their forecasts (which means in practice, shifting their rulers to extrapolate the most recent data points). One of the more extreme examples has just been delivered by Den Danske bank, which is 'calling off the euro area debt crisis due to improving PMI data'.

Come again? We have news for the analysts at Den Danske: the governments of the European welfare states are even more insolvent today than they were back when the crisis was still acute. They have all seen their debt loads increase further, in many cases at a stunning clip. Absolutely nothing has happened to alter this fundamental fact of de facto insolvency. A few months of improving PMI data are the functional equivalent of spitting into a hurricane in this context. Similarly, with their sovereigns bankrupt, virtually the entire euro area banking system, which sports uncovered deposit liabilities amounting to € 4 trillion, is just as bankrupt. These four trillion euros are overnight deposits the fractionally reserved banks owe to their depositors on demand and for which no reserves exist. If they are not insolvent, what are they?

Here are excerpts from Den Danske's assessment – at least they acknowledge in passing that there has been no reform worth mentioning yet, but as noted above, they are confusing a cyclical improvement in 'economic activity' that is largely due to  a bout of credit expansion ex nihilo  with an 'end to the debt crisis'.


“There are increasing signs that Europe currently is leaving the crisis behind much faster than most had expected … Today’s PMI data signal growth in both Italy and Spain. It’s now only Greece that appears to be stuck in recession for some time,” said Frank Øland Hansen, one of Danske Bank’s Europe analysts, in a note.

“It’s our assessment that the debt crisis is over. With that, we think there will be no more market panic, where uncertainty about one country spills over into others and creates fears for the entire survival of the euro zone,” he added.

“There will still be bumps along the road, but we’ve seen the euro area able to handle large obstacles, so we don’t expect smaller bumps will trigger renewed panic on the financial markets in the future.”


“The recovery is fragile and largely reflects that the rest of the world currently is improving. If the global recovery derails, it will look bad for Spain and Italy,” Hansen said.

“Reforms are still necessary, and there is in both countries a long way to go before the government-debt situation is under full control.”


(emphasis added)

Allow us to point out that the 'government debt situation' in these countries is not under any kind of 'control' at all – it is in fact completely out of control, especially in Italy.

And while Spain has seen an improvement in its competitiveness in terms of unit labor costs and an easing of current account related pressures, the housing bust continues. There is one home for every 1.7 inhabitants in Spain – it will be a long time before it lives down the after-effects of the bubble. Meanwhile, both Spain and Italy are facing ever more dire demographic challenges as well.



italy-government-debt-to-gdpItaly's public debt to GDP ratio continues to climb at a rapid clip – click to enlarge.



spain-government-debt-to-gdpThe same applies to Spain – click to enlarge.



Credit Markets

Both CDS spreads on sovereign debt and government bond yields in the 'periphery' have recently begun to rise again from a higher low.

Portugal has seen a sharp rise in its CDS spread to 520 basis points. This is actually level indicating intensifying crisis conditions. Moreover, the markets are increasingly wary of Eastern European countries in view of the recent currency and debt convulsions in  a number of emerging market countries.

Below are a few charts illustrating the situation. As usual, charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Tuesday's close.



pigs5 year CDS on Portugal, Italy, Greece and Spain – Portugal is racing ahead – again, we might add. It was one of the first countries to require aid when the crisis began – click to enlarge.



10yrbonds10 year government bond yields on the same four countries. Note, Italy's yield shown here is the generic bid, the actual yield is at 4.56%, higher than Spain's – see the next chart – click to enlarge.



Italy, 10 yr. yieldItaly's 10 year government bond yield over the past three years – click to enlarge.



ee15 year CDS on Bulgaria, Croatia, Hungary and Austria – in Eastern Europe, spreads are rising – click to enlarge.



ee25 year CDS on Latvia, Lithuania, Slovenia and Slovakia – obviously, euro area member Slovenia is not out of the woods yet either – click to enlarge.



ee35 year CDS on Poland, the Ukraine and Estonia – the pressure in the Ukraine continues – click to enlarge.



eurobasisswapsThree month, one year, three year and five year euro basis swaps – the recovery is stalling out a bit – click to enlarge.



bondylds10year yields on UK gilts (yellow line), German Bunds (orange line), Austria's 10 year government bond (green) and Ireland's 10 year government bond (cyan). Gilt yields continue to misbehave and ignore Mr. Carney – click to enlarge.



mecdsAnd lastly, here are the 5 year CDS spreads on Morocco, Turkey, Saudi Arabia and Bahrain – with Turkey still the obvious standout. The rest of the region seems to be in the grip of Syria-related worries – click to enlarge.




Things are not as calm in the credit market arena as one would expect if all it took to take the crisis off the table were a few improving PMI data. The surge in euro area money supply growth over the past year is already being undermined again, as bank credit growth has recently stalled and reversed, shrinking by 5.1% annualized over the past trimester. As Sean Corrigan recently pointed out, the improvement in PMI data likely also owes much to the inventory cycle, which is well known for delivering false dawns (just look at Japan's post bubble history).

We would argue that the crisis continues to be on an extended 'pause', but it may well flare up again once the troika's bean counters take their next close look at Greece, Portugal and Slovenia after Germany's election. In our opinion, the major wild card and probably the place that is most likely to create a serious aggravation of the euro area's simmering problems remains Italy. In Italy, no discernible improvements in the most important data points, namely public debt growth and unit labor costs, are in evidence yet. France will also continue to hover over the proceedings like the proverbial sword of Damocles unless its political leadership gathers up the courage to deliver much-needed drastic economic reform – an unlikely prospect considering the appalling economic illiteracy of Hollande and company.

Lastly, Germany may very well become the center of a new bubble if growth in credit and money picks up again (for details on this, see this previous article on Germany's bubble potential). Such a development would imply an even longer crisis pause, but it would be followed by an even worse bust once the boom falters. No credit expansion-induced bubble ends well.




Charts by: Bloomberg, Tradingeconomics, BigCharts


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • underpass-libraryThe Baby Boomer Survival Guide (Part I)
      The Yellow Machines Go Silent PARIS – What should you do if you are running out of time and money? This is the question we get from readers over 50… over 60… and sometimes over 70. We baby boomers were famously “na… na… na… live for today.” Now, it’s tomorrow. And many of us – often through no fault of our own – are having trouble making ends meet. At the Diary, we write about the world of money. About economic policy and how it affects you. But what if,...
  • US-winds-down-quantitativ-012Faith in Central Banks Dwindles
      Even Bloomberg Notices that Something is Amiss As anyone who hasn't been in a coma knows, assorted central bank interventions have failed to achieve their stated goals over the past several years. A recent article at Bloomberg focuses on their failure to reach their “inflation” targets. Of course, this particular failure is actually reason to celebrate, as it means that consumers have at least been spared an even sharper decline in their real incomes than has been underway in spite...
  • 3 EURO FRONTEU Moloch in a Fresh Bid to Inflate
      Brussels Alters Capital Requirements to “Spur Lending” Saints preserve us, the central planners in Brussels are giving birth to new inflationist ideas. Apparently the 2008 crisis wasn't enough of a wake-up call. It should be clear by now even to the densest observers that a fractionally reserved banking system that flagrantly over-trades its capital is prone to collapse when the tide is going out. 2008 was really nothing but a brief reminder of this fact. The political and...
  • St._Benedict_delivering_his_rule_to_the_monks_of_his_orderThe Baby Boomer Survival Guide (Part II)
      A Lehman Moment for Commodities? LONDON – Today, we continue our philosophical look at what you should do if you are running out of time and money. (You can catch up on Part I here.) Where do we begin? With how to add wealth? Or how to lose it? The way to lose it is simple. You buy something that is not worth the money you paid for it. You are instantly poorer, whether you know it or not.   The pleasingly plump. Illustration by jdeer69     DJIA, daily...
  • SwanUS Stock Market: A Retest or Worse?
      Gray Swans and Black Swans By Monday's close, the S&P 500 Index was closing in on the low established in the August swoon – such a retest was essentially our minimum expectation, as V-shaped rebounds are very rare. The question is now whether it will only be a retest, or if something worse is in the offing. No-one knows for sure of course, but we'll briefly discuss what we are looking at in this context.   Image via NYTimes   It is interesting that as the market...
  • doom2Climate Fanatics Run Into Public Relations Snag
      Scientists Turn into Stalinists Last week, we happened  to stumble across a press report about a group of climate scientists so eager to shut up their critics that they want to employ the State's police, courts and jailers for the purpose. Specifically, a group of academic (and presumably tenured) climate alarmists supporting the “CAWG” theory (CAWG=”catastrophic anthropogenic global warming”) have written a letter to president Obama, attorney-general Lynch and OSTP director...
  • utopia-deniedSwiss Parliament Shoots Down Socialist Utopia
      No “Unconditional Basic Income” Similar to the minimum wage initiative pursued by Geneva-based socialists (which was rejected in a referendum - see “The Swiss Remain Sane” for details), another Utopian socialist dream has just floundered in Switzerland. As the European press reports, this time parliament has shot down a radical proposal forwarded by Socialist Party representative Andreas Gross.   Photo via anti-kapitalismus.org   Gross wanted the State to pay...

Support Acting Man


Own physical gold and silver outside a bank

Realtime Charts


Gold in USD:

[Most Recent Quotes from www.kitco.com]



Gold in EUR:

[Most Recent Quotes from www.kitco.com]



Silver in USD:

[Most Recent Quotes from www.kitco.com]



Platinum in USD:

[Most Recent Quotes from www.kitco.com]



USD - Index:

[Most Recent USD from www.kitco.com]


THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Buy Silver Now!
Buy Gold Now!