The Netherlands and Germany between inflation and recession

For public finances to be healthy, the economy must be sick

The fiscal conservatism of Germany and the Netherlands clearly limits the growth potential of both countries. The 45% of economists and think tanks active in the AIECE research network consider the current monetary policy in the eurozone to be too restrictive, while only 25% consider it to be correct. In particular, the respondents pointed to the governments of Germany and the Netherlands as those that are only insufficiently supporting their economies. The budget deficit of these two countries will amount to 1.6% of GDP this year for the former and 2% of GDP for the latter. By way of comparison, the figure for Italy is expected to be 4.4% and for France 5.3%. At the same time, many countries are struggling with much higher inflation than those between the Rhine and Oder, for example. It’s like between an anvil and a hammer: either you spend less money on stimulating businesses, leading to a slowdown in the economy and ultimately to recession in the country (Germany, Netherlands), or you increase public debt and the budget deficit through excessive spending, pumping money into the economy, which brings inflation with it (Italy, France).

In 2023, it paid off to pursue an expansionary fiscal policy that avoided a recession. In terms of GDP, higher government spending in Italy and France replaced falling demand, leading to positive growth rates. Countries that cooled their fiscal policy achieved lower growth rates and in some cases paid for this with a recession (see the Netherlands, where GDP fell by 0.3% year-on-year according to the latest figures). Denmark stands out from this pattern, as it achieved growth of almost 2% despite its restrictive fiscal policy. However, it is worth noting that economic growth was boosted by the huge success of Novo Nordisk, the manufacturer of weight loss drugs. Without the pharmaceutical industry, GDP would probably only have grown slightly.

At the same time, it should be noted that the higher inflation in countries with a more expansive fiscal policy is due to the fact that government spending has had to react to cost shocks. For example, countries that are more susceptible to supply shocks due to a higher share of food and energy in the basket of goods have taken more comprehensive and longer-lasting shielding measures for ordinary consumers. However, the reversal of these measures is slow, which is also slowing down the disinflation process.

A new threat to inflation is the escalation of wage demands in the major EU economies. Figures from the European Central Bank (ECB) indicate that growth in collectively agreed wages was stable at just under 3% in the fourth quarter. At the same time, these figures are published with a considerable time lag and show a rather outdated picture that ignores the ongoing negotiations between employers and employees. A completely different picture emerges from the internet search data, where questions about pay rises are reaching historic highs in almost all major EU economies. For example, Dutch internet users are now twice as likely to search for terms relating to pay rises than in 2016-2019, i.e. before the pandemic. In such an environment, rapid disinflation is highly unlikely.

Quelle: Google Trends | Gehaltserhöhung = salary increase, Lohnerhöhung = wage increase, Loonsverhoging = wage increase, Salarisverhoging = salary increase, Augmenter = Increase, Aumento = increase

To summarize, the impact of fiscal policy in 2023 has proven to be quite intuitive and textbook, although it is worth noting that the consequences of some fiscal tools will also show up over a longer period than just a few quarters (e.g. investment, education spending, etc.). Countries that pursued expansionary fiscal policies had to accept higher inflation but managed to avoid recession, while governments that focused on central bank support had to accept recession/weaker growth but achieved lower inflation rates at the end of the year.

The US economy ahead of the elections

The biggest surprise on the financial markets this year is that inflation is continuing. While investors had hoped not long ago for 4 interest rate cuts by the Fed this year, there are now only 3, and with a significant delay. This underpins the thesis we have often expressed that central banks do not fully understand the dynamics of the current inflation. The indicators suggest that parts of the economy, such as real estate and the automotive sector, are struggling with high interest rates, while other sectors, such as the defense industry, the semiconductor industry, the AI industry and the manufacture of anti-obesity drugs, are experiencing a boom. So, after the pandemic, due to new IT technologies and the war in Ukraine, a two-speed economy has emerged, where monetary policy is more difficult, as supporting the weak parts of the economy can go hand in hand with persistent inflation, which is more costly for companies.

Investors try to glean from the Fed’s statements the level of future interest rates (i.e. how much the money – the loans – will cost businesses in the future). It is often the case that the worse the situation in the economy is, the higher share prices rise as investors hope that in response to weak economic data, the Fed will cut interest rates to stimulate the economy. Just yesterday (July 3, 2024) we had an example of this: the ISM index for the service sector collapsed and – excluding the Covid-19 pandemic – fell to its lowest level in almost 15 years. And Wall Street hit record highs in response.

So investors believe this two-speed economy will continue to work. Meanwhile, fiscal spending in the US is unsustainable in the long term and current government bond yields are increasing government spending related to debt, taking away funds for citizen welfare and infrastructure. The US government has to deal with the risk of an economic slowdown or risk letting inflation run high for longer. So the scenario is: whether Democrats or Republicans win, they will have to increase spending (read: inflation), which will cause the Fed to perhaps raise interest rates even higher.

Investors need to understand that the real killer for stocks is recession, not inflation. Yes, I know that the examples, such as the behavior of the stock markets in Turkey or Argentina, clearly show that high inflation need not be a particular problem for equities in the long term. But one day the moment will come: even large companies will not be able to generate higher profits in the face of expensive loans, high taxes and wages. On that day, it will no longer be worth putting money into shares. Even in the USA.

Serfdom enhanced

A few centuries ago it was all visible. A peasant – a serf – was obliged to work, say, three days a week for his landlord, and he was obliged to give away a part of the agricultural produce from his household. The amount of work and the amount of the produce were all visible, palpable. If a landlord wanted to extend the time of work done by his serfs for his benefit or take away from the serfs more than was prescribed, the serfs would have rebelled because it was a matter of survival and the maintenance of the standard of living. A serf needed the three remaining days to work for the upkeep of his family; the serf needed to have the rest of the agricultural produce at his disposal for his family to survive. If a serf had been forced to work four rather than three days and give away more than usual from his produce, he would have had less for himself and his family. In other words, working as much as before, he and his family would have had less. The serf would have known who was to blame for this.

Today it is all for all practical purposes invisible. A government prints more and more money and causes inflation. The government does not need to raise taxes. The amount of the tax that is levied on workers may stay the same. Still, due to inflation, labourers or present-day serfs, although they work as much as before, can buy less and less. Of course, sooner or later the present-day serfs notice that they are worse off, but they notice it belatedly and – what’s worse – there is no one person, known to them by name, who is to blame. Yesterday’s serf could have rebelled against his landlord and oftentimes he did; today’s serf can rebel against… inflation, which means against nobody. Yesterday’s serf could have threaten his landlord with a pitchfork – and sometimes it happened. Today’s serf can cast his vote from time to time, to vote out of office some, and vote into office others and, as a result, receive more of the same in terms of economic policy. None of the politicians that currently hold power can stop inflation, even if he wants to. The purchasing power of the present-day serf is constantly diminished, and though the present-day serf is not referred to as serf but, rather, as a citizen with a batch of human rights, he can do nothing about being robbed of the fruits of his work.

Historical record shows that prices used to be stable over decades. Our day-to-day experience teaches us that generally in a longer perspective prices can only rise. If they level off, then but for a short time, while they never fall if viewed over a longer period.

Turkey, a NATO member, to join BRICS!

The leftist West is getting a blow back!

– The elections to the European Parliament elevated parties that are maliciously referred to as far-right;

– the war in Ukraine is going badly for the collective West;

– in the United States Donald Trump, maliciously labelled as populist is about to win the presidential election;

– France and the United States are being pushed out of Africa;

– de-dollarization is in progress;

– Slovakia’s Prime Minister Robert Fico has survived the assassination (how the EU commissioners would have wished he had died!);

– Hungary’s Prime Minister Viktor Orbán is openly against the European Union’s policy of confrontation with Russia; and now – to top it all

– Turkey – has announced its willingness to join BRICS!

What a mess! Turkey, which boasts the second largest army in NATO, is about to seriously partner among others with… Russia, a country against which the same NATO is waging war!

The West is getting blow after blow after another blow. How ungrateful the world is! The collective West has been meaning to

– save the planet from the man-made climate change;

– extend the human rights by bringing to the forefront homosexuals and lesbians;

– eradicate racism by coercing races and nationalities to share the same ares, towns and villages, schools and factories,

and it turned out that the world has remained blind and deaf to all those advances… Goodness me!

All of which might suggest one serious suspicion: out of impotence and a thirst for vengeance the collective West might be thinking about retaliatory steps. What are these going to be? The leftist West needs to disrupt BRICS, to keep Russia at bay, to stop the march of the “far-right” through the institutions (a historical irony, indeed), to thwart Donald Trump from winning the elections, to preserve the dollar as the instrument of global exploitation and dominance, and so on, and so forth. What are they going to do? A wounded and hitherto domineering animal can be terribly dangerous.

FED is not playing fair – can it go bankrupt?

The most important central bank in the world, the US Federal Reserve (FED), recently presented its financial report, which shows that it had a substantial loss of USD 114 billion last year. Why such a large loss for the FED? To explain this, one should first distinguish between two aspects of the central bank’s activities.

Firstly, the FED holds large quantities of US bonds, which in turn yield interest. Of course, in this case, this interest is income for the central bank. It is worth noting that since the FED began buying bonds on a large scale in 2008, interest rates have also risen considerably
Secondly, the Federal Reserve allows commercial banks and various types of funds to hold money in an account at the central bank. At the same time, it pays a certain amount of interest on these funds, which depends primarily on the level of interest rates.

Well, between 2022 and 2023, there was a series of interest rate hikes in the US. Eventually, a level of 5.5% was reached. This meant that the FED had to pay 5.5% interest to banks and funds (and there were a lot of them) that wanted to keep their money in a central bank account.

So on the one hand, the Fed still held a similar amount of bonds in 2023, for which it received interest rates close to the 2022 level (i.e. much lower than this 5.5%). On the other hand, it had to pay much higher interest rates to commercial banks or money market funds. This resulted in the loss.

You may ask: What happens when a central bank suffers a loss? From a purely financial point of view: Nothing significant happens. It is assumed that this loss will be covered by future profits. In the context of a central bank, it is difficult to talk about bankruptcy, especially as central banks can create gigantic amounts of money under the current system.
Gefira is critical of the monetary policy of central banks, but for completely different reasons. No one from the central bankers is commenting on the following questions:

1) Is it fair that the central bank only rescued and wants to rescue selected financial institutions simply because they operate on a large scale?

2) Is it normal for these institutions (especially banks) to hold their reserves at the central bank and safely receive a few percent interest in return?

3) What’s more – is it fair that unprofitable companies are kept alive by the central bank printing money, which in turn makes it more difficult for new companies to enter the market?

4) Is it good for the economy that unprofitable zombie companies are kept afloat in this way, which otherwise – in the real free economy – should have gone bankrupt long ago?

Argentina’s President Milei successful against the Davos elites

In December last year, we wrote about Javier Milei – the recently elected President of Argentina. Now, with his recent speech in Davos, he has turned the bottom into the top.

To understand what happened and what Milei got himself into, you first need to comprehend what exactly the World Economic Forum (WEF) is and who makes it up. The WEF is the world’s elite: the CEOs of the world’s richest companies (only companies with billions in revenue are invited to the Forum), leading bankers and technology specialists, politicians, representatives of major business organizations, lobbyists, selected intellectuals, journalists and activists of all kinds. The WEF meetings are therefore full of people who use their connections and influence to try to steer the world in a direction that benefits them and not necessarily the majority of people. It’s about power and money, not about a better life for ordinary citizens.

The aforementioned elite meet every year in Davos to present their proposals on how they want to intervene in our lives. They negotiate agreements among themselves and exert pressure on the world’s most influential politicians. In the meantime, of course, there is a lot of empty talk and boring debates about the world’s social and economic problems. The founder of the forum is Klaus The-Great-Reset Schwab, who became known as an advocate of collectivism. He is credited with the famous saying: You will have nothing and be happy.

This is where Milei comes into play. In a place where the ideas of feminism, birth control and increased government intervention in the economy are supported year after year, where the foundations for Agenda 2030 and its associated eco-terrorism were laid, Milei looks the globalists in the eye and dismantles their propaganda simply and vividly by exposing the lies of the globalists.

In many of his interviews and speeches, Milei refers to the so-called culture war. In his view, the causes of Argentina’s decline are cultural problems and moral decay. Among other things, this gives rise to the deep belief that the state is the guarantor for the satisfaction of citizens’ needs. At the same time, the Argentinian president points out that state intervention is counterproductive, as it should only contribute to the opposite when trying to solve a problem.

Here we summarize the most important theses of his speech in Davos:

1. Capitalism creates prosperity and is moral

Socialism leads to impoverishment and is based on violence. Wherever socialism has been introduced, it has brought more harm than good.

“The West is in danger because it has opened itself up to socialist ideas. It was capitalism that liberated humanity from mass poverty and created unimaginable prosperity. (…) In the countries where we should be defending the values of the free market, private property and other institutions of libertarianism, parts of the political and economic establishment – some because of flaws in their theoretical approach, others out of a desire for power – are undermining the foundations of libertarianism by opening the door to socialism and potentially condemning us to poverty, misery and stagnation. It should never be forgotten that socialism is always and everywhere an impoverishing phenomenon that has failed in all countries where it has been tried. It has failed economically as well as socially and culturally. It has also contributed to the deaths of more than 100 million people.”

So capitalism, rather than today’s Western neo-Marxism, is the way to abolish poverty.

2. Socialism is a repressive and unjust system:

“(…) Social justice is neither fair nor beneficial to society. Quite the opposite. It is an inherently unjust idea because it is based on force. It is unjust because the state is financed by taxes and taxes are levied by force. Or would any of you say that you pay taxes of your own free will? In other words, the state finances itself through coercion, and the higher the tax burden, the greater the coercion and the less the freedom. Advocates of social justice assume that the entire economy is a cake that can be shared. Yet, this cake did not fall from the sky. It is wealth created by what Israel Kirzner, for example, calls the process of market discovery. If there is no demand for the goods produced by a company, that company will fail if it does not adapt to the demands of the market. If it produces a good quality product at an attractive price, then it will be successful and produce more because the market is a process of discovery in which the capitalist finds the right direction in the course of his actions. If the state, however, punishes the capitalist for his success and blocks him in this discovery process (through excessive regulation, as in the EU – author’s note), it destroys his motivation, and the result is that he produces less and the pie shrinks, which damages society as a whole. By inhibiting these processes of discovery and making it difficult to adopt what has been discovered, collectivism inhibits the entrepreneur and prevents him from flourishing.”

3. The fight for women’s rights or nature conservation is just a pretext:

“When the socialists realized that the workers were not getting poorer under capitalism, but richer, they changed their strategy. Today, the class struggle between capitalists and workers has been replaced by alleged conflicts between men and women or between man and nature. It is claimed that to save the environment, population growth must be controlled; abortion is promoted”.

4. Public opinion is the result of decades of “brainwashing” in the direction desired by the elites:

“The neo-Marxists have changed public opinion in a long process of taking control of the media, the universities and even international organizations. As everyone here knows, the WEF is one of the latter. Socialist ideas must be fought frontally and vociferously.”

5. Socialists have more than one name:

“There are many varieties of socialism in the broadest sense. Socialists are not only those who call themselves socialists, but also social democrats, Christian democrats, communists, Keynesians, Nazis, nationalists and globalists. They all share a belief in regulation and the state”.

6. The real heroes are the entrepreneurs. The state, on the other hand, is only a threat to freedom:

“The real heroes of society are entrepreneurs. They are creators of wealth who can be proud of making profits by meeting the needs of others. They should not be allied with the state, not even through the WEF. The state is not the solution. The state is the problem. The state is a threat to freedom.”

Since Milei’s speech, the number of views of his video on the official WEF channel has exceeded half a million. Is that a lot? Just look at the other “great speakers” who have lagged far behind. The conversation with US Secretary of State Antony Blinken, for example, reached 56,000, the speech by EU Commission President Ursula von der Leyen 42,000, and the other speeches received even less attention. (As at the end of January 2024)

An interesting case is the speech by Spanish Prime Minister Pedro Sanchez, who, as the country’s extreme socialist leader – i.e. in complete opposition to Milei – made a staid appearance and barely reached 12,000 views. In his speech, he talks about everything and nothing. He mentions the current problems and challenges, but offers no solutions. The Spanish Prime Minister’s speech was preceded by congratulations on Spain’s strong economic growth, which the Prime Minister himself also boasted about. So let us quote here the conclusions of one of Spain’s leading independent economists, Daniel Lacalle, who summarizes it as follows: ‘The reality in which Spain finds itself today is different from the one presented by the Spanish government under Pedro Sanchez. The ruling socialists are using the same techniques that the Greek socialists resorted to at the end of the 1990s. Namely, they are increasing public spending and debt to hide the fact that investment and consumption in the country have stalled and exports are falling. Taxes are being increased because/although tax revenues have been falling in recent years. The choice between because and although in the last sentence reveals what you think about the right economic policy.

Blitzkrieg of the anti-globalists next fall?

1% owns 50% of the world’s wealth and there are countries that want to change it. About geopolitical redistribution.

In 1974, the middle class had the highest share of world wealth. Today, it is at its lowest level in 100 years. Within the last 50 years, there has been a gigantic transfer of wealth from the working class to the class of society that owns assets. The latter, elitist stratum owns a disproportionate share of the wealth generated throughout the world and constantly increases it thanks to the central bankers who skillfully cause sometimes recession, sometimes revival of the economy through their interest rate policies and increase or decrease the money supply. These are the waves on which the great ones of the financial world surf and later eat caviar and drink champagne. You know it well that this elitist class is not sitting in Beijing, Jakarta, Rio or Moscow. It’s enough to name two cities and you already know who it’s really about: London and New York.

Erdoğan and the president of Brazil, leaders of ASEAN countries and comrade Xi – they all want to make their middle class bigger and stronger because they know it that the first industrial revolution, which lasted 150 (!) years, was possible only thanks to the creative and hard-working middle class. Therefore, they want to introduce their own monetary system, independent of Anglo-Saxon influences, which

(i) operates fairly,

(ii) is not dependent on a fiat currency like the dollar,

(iii) enables the middle class to accumulate wealth, and

(iv) does not serve to remove politically undesirables from the face of the earth through currency wars or military intervention. Suffice it to mention here how weak the Turkish lira is during Erdoğan’s tenure, or how Saddam Hussein fared because of the oil trade in euros, or Gaddafi because of the attempt to introduce the Pan-African currency, which was supposed to be based on gold.

The latter initiatives of countries seeking to free themselves from dollar domination – be it agreements between Russia and China, the BRICS initiative, agreements among ASEAN countries, and many others – all aim at creating some kind of common currency for these, as they are called in the West, “rapidly developing emerging economies.” This currency, however, should not be a fiat currency, such as the euro, but a currency based on tangible assets, thereby ensuring its purchasing power. It may be digital or classic – one thing is certain: its introduction will mean a huge war against the U.S. dollar. It will mean a war against the COMEX (USA) and LME (London) exchanges, where precious metal prices are now decided. And as we emphasized several times before in analyses in our bulletins: these prices have been suppressed and manipulated for decades by the so-called US bullion banks. So, the elitist class that owns the highest share of the world’s wealth may be in for a treat this September, when the BRICS group’s decisions are to be made. One possible scenario: the BRICS countries may, for example, buy countless futures contracts on precious metals and demand delivery of the physical commodity on the expiration date. Since it is common knowledge that COMEX and LME can physically back up perhaps only 20% of their transactions with physical reserves (the paper gold problem), there would be a collapse similar to the Nixon days.

So will the yuan or a whole new emerging market currency soon become a new world reserve currency? If you look at the chart below, you can see that nothing lasts forever and that the dollar’s days may be numbered.