Is Finland's Economy Suffering From Secular Stagnation? (Cont)

What To Do About The Situation?
The whole topic of secular stagnation is a highly controversial one at the present time. In the first place there is no general agreement that this is what is affecting a country like Finland. Those, like Prime Minister Alexander Stubb would argue that it is simply a question of the country having lived beyond its means, and hence lost competitiveness.

Thus, in his opinion, what it now needs is a lengthy process of internal devaluation and austerity. Curiously - in a country that was busy recommending sharp austerity to others - he blames rising debt and lax fiscal policies for the situation. Finland's economy could flat-line through the 2020s, he suggests, if politicians fail to curb taxes and government debt.

    The government debt of Finland has almost doubled since 2008, from 28 percent of gross domestic product to 48 percent at the end of 2014. Taxes have risen 3 percentage points over the same period as different administrations tried to preserve benefits without resorting to deep cuts. The jobless rate this year will rise slightly to over 9.1 percent, the government estimates. GDP languishes below its 2008 level - Bloomberg News.

Certainly, having not adequately analyzed what was happening, the country has been running a series of fiscal deficits which continued beyond the crisis as the momentum provided by the housing boom has waned.


Naturally, with no growth and low inflation the government debt level has been rising rapidly. The level is still low - the IMF forecast it will hit the 60% of GDP EU limit this year - but if it continues rising at this rate it won't stay low for long.


So, what do you do about the problem of secular stagnation, if that is what it is? Again, here there is divergence of opinion. Some still seek to treat the phenomenon as if it were a variant of the liquidity trap issue. Most notably Paul Krugman, who continues to hope that massive quantitative easing backed by strong fiscal stimulus will push economies like the Finnish one back onto a healthy path. But if the issue is secular stagnation, and the root is population aging and shrinking, it is hard to see how this can be.

The fact that Japan is just about to fall back into deflation 2 years after applying a monumental Quantitative Easing problem seems to endorse the idea that the problem may have no "solution" in the classical sense of the term.

Is There A Temporary "Free Lunch"
Nothing ever comes entirely free, and one of the issues which arises with permanent QE is that it may be applied only at the cost of generating bubble type problems elsewhere, an issue which I look at in Secular Stagnation - On Bubble Business Bound. But developed economies are in a bind, and they do need to find some path to move forward along.

At the end of the day, only two things can be said with a fair degree of certainty: short term fiscal austerity won't make any significant improvement to Finland's situation, and it could help make things worse (this whole discourse is based on a misunderstanding about what the problem is) while, on the other hand, what short term stimulus won't do is stimulate.

Structural reforms - aimed to increase labour market participation rates, and extend working lives - can help. So can measures to improve the quality of education, and the effectiveness of investment into new technologies. But if we look at Japan, even these offer no simple panacea.

Finnish society, like many other European ones, is in the throes of a major transition. More debate needs to be held on what to do to facilitate the transition, and in the meantime deficit spending to make investments in future productivity improvements seems not to be a bad idea. Running deficits in order not to change, in contrast, would be.

http://seekingalpha.com/article/3035846-is-finlands-economy-suffering-from-secul...
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Whilst there are some variations, you may recognize SOME similarities?


The overriding issue is that change on a massive scale is impacting the Global Economy & the "old fixes" simply won't work anymore!

We should have started changing policy/s 40-50 years ago, to make way for what is now happening, BUT WE DIDN'T, so now change will be forced, much quicker than it should have been & most likely much more unpalatable!

That said, IF the change/s are not "fairly spread", then they won't work, they will only make matters worse!

So, I would suggest the following, for starters -
1) Removal of a large number of TAX/Expenditure RORTS.
2) The imposition of Higher, not Lower Taxes, on both Business (up to say 32%, not down to 28.5%) & Individuals (Raise by 2-3% for all levels).
3) Raise GST to 12.5% & make it applicable to pretty much everything.

The time has long since gone, when we can "pretend" there is no problem &/or that the other Political Party are the problem.

Both major Political Party's have been & are the problem, because they didn't take appropriate action/s over the last 40 to 50 years, the problems are here now & we need to act now!

Why Are Stocks So Volatile?

Stock market volatility has increased dramatically over the last six months. Many commentators are saying the increased volatility is a negative sign for stock performance through the remainder of the year and perhaps beyond. As usual they might be right, and they might be wrong. Before we give you our view, let's look at what we believe are the three main drivers of the increased volatility and see how they are trending.

1. Uncertainty about the timing of the Fed rate hike

2. Earnings worries

3. Valuation concerns

The Fed: Don't fight the Fed, don't fight the Fed, don't fight the Fed. As any seasoned investor knows, these are the first three rules of investing. The Fed has incredible power to impose its will on the markets.
We believe the Fed has no intentions of causing a big sell-off in stocks. Indeed, Quantitative Easing was all about pushing investors out of riskless securities and into riskier assets, including stocks.
The Fed wants to keep a lid on inflation and stimulate job growth, yet it also wants to avoid both another 1995-1999 stock market melt-up and a 2000-2002 meltdown.
To accomplish their purposes, they are likely to do a lot of talking but very little acting.

Earnings: Earnings growth for the S&P 500 over the last 12 months has been a paltry 4.3%. During this same time, stock prices have risen nearly 13%.
The market has given the weak earnings a pass so far because of two unusual events:
1. The dollar has risen by as much as 20% versus the currencies of other developed countries. This trend cannot continue indefinitely.
2. The entire Energy sector took a huge earnings hit in the fourth quarter of 2014 and will again in the first quarter of 2015.

Valuation: If prices rose in 2014 by 13% and earnings grew by only 4.3%, then the price-to-earnings (P/E) multiple expanded. Indeed, the P/E multiple now stands at nearly 18 times earnings, which is the highest level since 2007.
Stocks are not cheap from a P/E perspective, which worries a lot of investors.

Bottom Line
Uncertainties about many different factors have caused stocks to become more volatile.
http://seekingalpha.com/article/3047056-why-are-stocks-so-volatile?ifp=0
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What we have here is a situation where Demand & Growth is being restricted, like a huge Boa Constrictor, in the form of Demographics, as the Global Population first grows older, then starts to actually Decline, over the next 10-20 years!

Also, we have the great Economic Growth enabler of Cheap & plentiful Energy, going into a different era, as Shortages appear & become more prevalent, at the lower Price end of the market.
Whilst the Global Economy remains in slow down mode, then Energy Prices will remain on the low side, which means that another Population Growth spurt is impossible, as a resurgent Energy Demand would cause Energy Pricing to explode! 

The US Federal Reserve and US Government, has so far been successful in preventing a Global markets collapse.
However, as I have said previously, everything has limits and at some point over the next year or two, even the FedRes will reach their limit/s, as even they have no magical "solution/s", to the big 3 market restraints -
1) Demographics - Aging & Decline.
2) Energy - Supply & Pricing.
3) Climate Change - Dwindling Food & Fresh Water Supply, which will work against regrowing the Population - another Baby Boom!

What Economists And The Fed Don't Get About The Economy

Summary

Why most economists are wrong to only look at the big picture.
The implications of "Fed meddling" in the economy.
How studying consumer spending has given me greater insight into the future of the economy.

I often get pegged as an economist, but if you've listened to me speak, you know that I don't consider myself one.

That's because economists think you can come to conclusions about the economy by following economic and monetary policy that pours out of Capitol Hill or the hallowed halls of the Federal Reserve.

How convenient.

Try as they might to manipulate the economy, the Fed does not fundamentally control the economy.

Most economists don't understand that…


As I explained on Monday, we've developed a number of cycles at Dent Research, but the one we're most known for - and the one that remains at the top of my hierarchy - is demographics, the predictable things people do as they age.

As we age, everything about us changes - even things like calorie intake, height, and weight, which peak at age 14, 19, and 60 respectively.

I've even found that the propensity to innovate, as well as the way power is distributed across society, relate to age.

The younger generation tends to be more innovative as they're more familiar with current technological advances. This peaks at around age 22. The older generation, however, holds most of the power, especially at age 64 when their net worth and workforce participation peaks.

Young people tend to be inflationary since they "cost everything and produce nothing."

Older individuals, on the other hand, are deflationary as they downsize virtually everything. They reduce food intake, spending, driving, and even downsize their homes. They even lose weight and inches in height… it's inevitable.

The serious saving begins when people hit their mid-to-late 40s. But by age 64 on, they begin dipping into their vault and start spending down those savings. Statistics show they stop earning and retire on average at 63.

There was another benefit to this in-depth research into the consumer: We could more accurately plot the total spending cycle by year, not just by five-year units.

When we were able to pinpoint the exact peak, it was age 46… as past correlations had already suggested.

But we also noticed a plateau in this version of the consumer cycle of spending that landed between the ages of 39 to 53. See the chart below:

Spending rises rapidly into age 39 as the rate at which people buy homes climbs. Spending first slowed down - and with it, economic growth - when the baby boomers first hit that plateau in 2000. Eventually, it peaked at age 46 in 2007… bringing our next key turning point to late 2014, when the boomers reached age 53 and the plateau finally started to drop off.

There are two factors driving this plateau from 39 to 53. First, is that affluent people peak in their spending later than average. While the average person peaks at 46, the most affluent go to school longer, as do their kids.

This is one of the biggest reasons why the Fed's money printing in late 2008 worked to a moderate degree up until now - they were riding on the coattails of a generation's peak spending. Economists who expect this improving trend to continue will be disappointed.

Those boomers who were born in 1961 - right at the peak of their generation - turned 53 last year, meaning they've already stepping off that plateau.

While most economists are predicting growth of 3% to 4% this year, extrapolating trends as always, we're keeping an eye on how the tapering of quantitative easing will impact us… as the baby boom generation continues to fall off the final demographic cliff at age 53, and auto sales start diving like home sales did back in 2006.

Don't get caught off guard.

http://seekingalpha.com/article/3047996-what-economists-and-the-fed-dont-get-abo...
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As I have said previously, even the FedRes has limitations and they have no magical "solution/s", to the big 3 market restraints -
1) Demographics - Aging & Decline.
2) Energy - Supply & Pricing.
3) Climate Change - Dwindling Food & Fresh Water Supply, which will work against regrowing the Population - another Baby Boom!

That said, were the FedRes & others, who are obviously invested in Economic Growth continuing its modern patterns, were to come out and say what is actually likely to happen, then that would most likely speed the inevitable Economic Collapse, SO THOSE ECONOMISTS BATTING FOR THE"STATUS QUO", WILL AVOID REALITY AT ALL COSTS, BUT THAT WILL NOT STOP REALITY FROM OCCURRING!!!

A Message, to the RBA  -

Any further lowering of interest Rates, will damage likely future Demand, not improve it!!!

In making current & future decisions, look at what has actually happened recently in Japan, Europe & the USA and the answer is nothing!

Zero interest rates haven't revived those Economies and continuing to lower OZ interest Rates won't help the OZ Economy either!

In fact, it will only lower Demand further, as that would further erode the spending capacity of older Australians, which is already at a low ebb and older Australians influence a very sizeable portion of the OZ market/s!

Iron ore price plunges below $US47

The pain for local iron ore miners is showing no sign of healing anytime soon as the commodity's price sinks quickly toward $US45 a tonne.

At the end of the latest session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US46.70 a tonne, down 4.9 per cent from its prior close of $US49 a tonne. The figure is a record low since The Steel Index began releasing the data in 2008 and the lowest level seen since 2005-06 when miners used to set yearly benchmark contracts with Chinese steelmakers.

The recent falls have turned the spotlight on Fortescue Metals Group, which has flirted with six-year lows during the current run of red sessions as the iron ore price slips below its breakeven price for production.

Smaller iron ore rivals, Mt Gibson Iron, BC Iron and

Atlas Iron

, are also facing intense scrutiny as the price continues its descent to the detriment of stock prices.

However, BHP iron ore boss Jimmy Wilson has again defended the miner, arguing its plans to lift supply are not about driving the price lower.

“We don’t like the iron ore price going down by any means,” he told The Australian.

“We would prefer the iron ore price to be higher, but we have to accept the inevitability of the fact that demand has flattened.

“At the end of the day we are in a commodity business which goes through commodity cycles.

Also bearish is renowned economist Ross Garnaut, who has said that steel production in China likely peaked last year, with iron ore prices to be further hit by softening demand if miners don't scale-back their plans.

"The price trend is down until enough of the old or new supply capacity has been destroyed to balance the decline in demand," Professor Garnaut told The Australian Financial Review.

While miners are feeling the heat, Treasurer Joe Hockey would also be feeling the strain as assistant treasuer Josh Frydenburg has recently declared a $US10 drop in iron ore prices hits budget revenues to the tune of $10 billion.

http://www.theaustralian.com.au/business/latest/iron-ore-price-plunges-below-us4...
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The Decline of the smaller/more recent Iron Ore players, would seem to be confirmed by Atlas Iron shares being suspended suspended today.
Atlas Iron is precariously close to becoming the first high profile victim of the spectacular collapse in the iron ore price, with the Pilbara miner understood to be weighing mothballing its operations and possible administration, as it on Tuesday suspended trading of its shares.
Bondholders in Atlas, which are mostly US-based, are secured creditors in the miner and will have a big say in the outcome.
The big question for its noteholders is - how much cash do you burn through before calling it a day?

http://www.smh.com.au/business/mining-and-resources/atlas-iron-shares-suspended-...

Getting ever closer the great economic tsunami. I wonder if we will just keep drifting along for another few years, gathering more and more debt, printing ever more fiat money on the computer monitor or if some catastrophic single event will tip us over the edge?

When I say we and us, I'm talking about the developed world, the Euro zone, the UK, America and Australia/NZ.

I like a very low $AU, it makes my retirement investments look good for the first time in a few years. I don't even mind if it gets to parity or below the $US.

I have no doubt that US Wealth Distribution has changed since 2007 and that MORE WEALTH IS NOW LOCATED AT THE TOP END!

Some at the Top End may well be thinking that everything is going according to the right plan?

HOWEVER, IN REALITY, THE TOP END HAS SEVERELY MISCALCULATED & THE LIKELY END RESULT, WILL SHOW THAT EVERYONE WILL LOSE OUT!