Sunday, February 1, 2015

Revealing The True Economy

The True State Of The Economy Is Shrouded In Mystery 
Good luck with getting a clear view of our economic future. Somewhere between what we are told is happening in the economy and what is occurring on Main Streets across America is the real and true authentic economy. It is ironic that the more the economy slows it only reinforces the idea that the Fed needs to pour even more fuel on the fire. This is exactly what many of us oppose and see as pure insanity. Some people point to or fear that deflation will take hold causing a great deal of pain and reduced spending by consumers going forward. Those behind increased and continued easing say more action is needed or a loop will develop that feeds on itself and ends in a deflationary depression.

On the other side of this argument are those of us who have a problem with current Fed policy and claim that after more than six years of expanding money supplies and dropping interest rate the economy has not fared as well as many in government represents. We that object with what has been done, loudly state that in the future both the economy and society will pay dearly for the sins of the Fed and that no options exist to get out of the box they have put us in. The fact is low interest rates have punished the very people who have done the right thing by saving and sacrificing to put away money for future needs. It must be noted savers have been encouraged and forced to take on risky investments as they search for higher yields that are unavailable in safer more conservative options. 

This debate continues to polarized those who study the economy and play in the dangerous land of investments. Meanwhile the failure of a crash to materialize and bring markets back to reality over the months and years is causing a breaking in the ranks. We have reached the point where many of the nonbelievers in current policy are capitulating and joining with those who live by the mantra "don't fight the Fed". This song of the market sirens that promise both wealth and profit has lulled many into complacency. Each day more investors surrender to lure of the markets and buying into what they had only a short time ago seen as the dark-side. Those who remain firm in their beliefs point to this as another sign we are nearing the top a place where all bulls are fully invested, this "all in" situation is a common sign of a market top.

Do not expect this to be resolved and either faction to accept defeat or to admit they are wrong until the economy reveals the truth and abundant solid undisputed growth is evident or we have sunk into a mess so dire that financial Armageddon is upon us. Our current perplexing economic state continues to confound and confuse. It seems every time the numbers fail to meet expectations or fall short those in power or the media raise the bar and crank out the fairly dust, some hype, or spin a tale of coming promises and stories of better times soon to come. This has postponed the day of reckoning and a resolution as to the debate. The conundrum we face is how to resolve this mess in the least damaging way. To those of us who doubt the numbers a massive problem exist on how to exit the current path.

Speculation Can Be Great Waster Of Time!

Speculation Was Not Kind To Mark Twain
Speculation has the potential to be a massive time waster, but both men and women tend to get sucked into this pastime that can while away the hours. This is not to say thinking through problems or looking at the various options being presented has no merit, but more often than not humans waste a lot of time pondering things that will never happen or never did. We even ponder why someone took a certain action or why something took a unpredictable turn.

Speculation is defined by Oxford University Press as,a noun, spekyəˈlāSHən  as the forming of a theory or conjecture without firm evidence: such as "there has been widespread speculation that he plans to quit" or as the act of investing in stocks, property, or other ventures in the hope of gain but with the risk of loss:such as "the company's move into property speculation"  This article is focused on the first definition of speculation. It is true that in terms of investment or other such pursuits speculation can extend into a form of placing a bet by buying or selling a commodity or stock. It can also be the driver for someone to scream a prediction from the rooftop as a way to prove their superior judgement or intellect.  As I have written in a prior post I consider predicting the future is an impossible task, a fools errand, full of pitfalls.

Events never seem to unfolded as we might expect or predict. When you see how the world has developed, the twist and turns are most unpredictable and full of what the author, Nassim Taleb calls "Black Swans", this term is used to describe events that seem to  descend out of nowhere catching everyone by surprise. A great example of speculation gone wild can often be found on the Sunday morning talk shows emanating from our nations capital. These shows originally designed to inform and report the crucial news of important issues facing our nation tend to quickly leave the facts and stray into the area of speculation. The line between opinion and speculation is fine and can easily be crossed. Blurring this even more is the habit many people have as stating an opinion as a fact does not make it one.

Speculationville is where the confident and suave television and news commentators, politicians, and the experts that speak with such authority live, I include the pundits and so called specialist. Whenever, I find myself drawn down the path toward Speculationville I try to stop and ask if the journey ahead has any real merit or payoff. Often the subject we speculate over is a big factor into just how frivolous the effort is. This means I find very annoying the efforts of media, news programs, and talk shows to drag us into huge areas of speculation instead of focusing on facts and important issues. When they start talking about who will run for President in not only 2016 but 2020 we know where they are taking us.

It is often not the message they crank out, but the spin and way they project it with their heads all a bobbing and their arms moving all around. It seems they have risen through the ranks by stating their case with such brilliance and force that we are carried away by their enthusiastic message. As the words spew from their mouths and we read the reams of material they write it is easy to overlook the large number of often misstated facts and forget they are speculating or merely guessing. Sometimes they even go as far as to tell us exactly what someone was thinking, for example a commentator might say, "when Martin jumped he knew it was to his death", I ask, how do they know that? It is possible that Martin was an optimist thinking he might survive the fall or the light never came on.

Fact is that when it comes down to what someone is or was thinking unless these authorities have had a deep honest one on one conversation with that person they are only speculating. After they have used every recent "buzz phrase" they say, "that being said" and after "having said that" they often wow me with "just do the math" or "it is not if, it is when".  A major pet peeve of mine is the mixing up of "millions and billions" of dollars when taking about money or cost. But what sends me over the top is a line of pure speculation often used by politicians and our so called public servants to justify some unsavory action, "it would of been far worse if we had done nothing". How do they know that? On more then one occasion when it comes to our government I find myself wishing they had done nothing.

We have all witnessed the crazy unenlightening information generated  from media coverage during "live crisis" coverage of a news event, it is a reminder that often the world is clueless. It seems that people love to defer to the opinions and advice of so called experts so they don't have to think. When we look behind the curtain, we often find their background in the subject is weak and short, or clouded and blurred by bias. One thing I do know that is not based on speculation or hearsay is that a certain point speculating about the future tends to get excessive and becomes a great waster of time. Most of us might better spend our time focusing on real problems in the real world rather then whether Michelle Obama will run for President in 2020.

Saturday, January 24, 2015

Unemployed Students Buying New Cars

Many People Are Jumping Into New Cars
For a long time I have had a problem as economist and others have pointed to the auto industry as proof that the American economy is on the mend. Today in America we see a land where even unemployed students are buying new cars. Claims that the auto market is hitting on all cylinders with annual sales topping 16.4 million, the highest since 2006 is a simplification of the situation and not giving enough focus as to where the sales are coming from or originate.

The facts behind what is pushing this market forward are very disturbing. Over 31% of all new auto loans this year were to subprime borrowers. Subprime loans now account for 36.5% of all outstanding auto loans. The easiest way to become a subprime borrower is by defaulting on previous debt obligations. In a shocking development, auto loan delinquencies surged by 13% in the last quarter, remember this is in a quarter the government claimed showed a solid 5% growth in the GDP. This means subprime loan delinquencies now stand at 18%. Issuing billions of debt to subprime borrowers for housing proved to be a disaster and going forward we should expect the same trend to reveal itself in autos.

Pretending to sell automobiles to people either dependent on money from the government or no means to pay for that automobile is not a good business idea. When you have huge financial lenders and the rest of the Wall Street banking consortium doling out 7 year 0% loans and subprime  loans as if it were candy it’s easy to move inventory. Sadly, while this may temporary boost the GDP the issuing of what is destined to become more bad debt always comes back to haunt us in the long run. A big problem is that often this increases the monthly obligations of someone who is already struggling.

We keep hearing about sales not about soaring profits. If the auto business is indeed healthy and booming why have GM profits fallen from $9.2 billion in 2011 to $5.4 billion in 2013, and on course to fall to $4 billion in 2014? Record levels of channel stuffing produces sales gains, but no profits. Why is their stock well below its 52 week high and near where it was in 2010 during its IPO and after it was rescued by Obama. We see the same thing with Ford as their profits have fallen by 35% versus last year and they are lower than they were in 2010. Another sign of problems is the rumbling coming out of Honda claiming the market has become a cutthroat low profit nightmare.

Auto loan debt continues to ratchet higher every month and is at an all-time high of $950 billion, up 33% since 2010 when the Fed, Wall Street, and the political class in Washington decided they needed new debt bubbles in auto loans and student loans to jump start our moribund economy. Recent figures showed that there are 65 million auto loans outstanding, and the average debt now stands at $17,352. Currently over 30% of auto “sales” are actually leases. The rest are financed over an average of 65 months. This means that virtually all new car sales are nothing more than 3 to 7 year rentals, this is a shocking way to look at what many people spin as proof that the economy has regained its footing.

The average student loan debt is now $33,000. Until the Obama administration went Keynesian much of student loan debt was primarily held in the private sector. When Obama entered the White House total student loan debt was $620 billion and delinquencies totaled $50 billion. There are now $1.3 trillion of student loans outstanding, with the Federal government accounting for $830 billion and guaranteeing a large portion of the rest. Delinquencies have skyrocketed to $125 billion and is not aging well. Going forward it is clear another taxpayer bailout beckons.

While I have focused on student and auto loans I'm aware this subprime buying binge has broadly spread to a wide range of consumers. Is was best said by someone who wrote "Only a University of Phoenix African Studies major is more of a subprime risk than the millions of ecstatic Escalade drivers cruising around our urban ghetto paradises." The Federal Reserve has been pumping in trillions of dollars of liquidity into the economy and much of it has resulted in pulling future consumption forward. These polices will soon become a headwind to both future sales and growth. This is more proof of just what an infusion of money from the Fed can produce and how it adds to the great distortion.

Sunday, January 18, 2015

Relevant Value Trumps Inflation or Deflation

Several years ago while grabbing a sandwich at McDonalds to get me through the work day I found myself having a conversation with another man in line. The subject of the government debt came up and I was somewhat shocked that not only did this man have absolutely no concern over the growing deficit but he went on to state "The government will never run out of money, they will just print more." The part I found troubling was that he didn't seem to connect the dots as to the ramifications of such a policy or simply did not care. It still shocks me that recent polls show many Americans agree with his attitude and view.

I would like to share a comment from a fellow named Art in response to both a recent article I posted and in regard to comments by other readers, it can be found below;
                ArtJanuary 16, 2015 at 9:45 AM    You guys know double entry accounting, right? Those govt liabilities are someone else's asset, to the penny. Thus, an aging and/or contracting population might require MORE govt liabilities, not less. And as long as they are denominated in the debtor's currency, solvency is essentially a non-issue. The constraint is inflation, which is nowhere in sight, despite what look like "high" levels of debt. 
Also, have you ever heard of a corporate bond analyst comparing a company's debt level to its income? Normally, you compare debt levels to assets, and debt service to income. We should do the same when looking at govt debt. And by that measure, the U.S. is mighty far away from problematic debt levels, unfunded liabilities and all. 

To say I differ with Art's opinion is an understatement, especially when he included "unfunded liabilities and all." You may believe what you want, but I caution you if you have any thoughts that the government or central bankers are anything resembling transparent. Both have been superbly entrepreneurial when it comes to generating Ponzi schemes and advancing the art of pseudo-economics. Over the years economic hocus-pocus has masked reality and allowed the current situation to develop. All these games have stirred up a great number of questions to what is real and muddied the water making it almost impossible to get a clear picture of what lies ahead. All the variables and moving parts have made this very confusing and difficult to get ones head around.

The crux of what is before us may hinge on relevant value rather than inflation or deflation. It is possible this is more multifaceted than most people realize and we have been mislead into arguing and debating the wrong issue or are viewing the subject in the wrong light. In what is often referred to as the "end game" or the time the global economy will be forced into resetting, I believe the situation will focus on issues of currency and debt valuations. These "debt valuations" will include both government and private obligations. If someone is caught holding a worthless currency or is owed money that is washed away or not "properly repaid" they will suffer greatly. This means some people and countries will be big losers as value and wealth shifts to the "flavor of the day" driven by demand or searching for a safe haven.

 A very interesting bond exist between value and wealth. It becomes visible when you dive into the issue of where and how wealth is stored. A surprise to many people is where wealth is stored varies from country to country, this is very important. The reason for this variance may be cultural, based on historic values, in reaction to how an economy developed, or because of tax policies. The example I like to use that illustrates this is house prices in China, they are very important to that country because that is where almost 75% of household wealth is stored. Here in America a very large share of household wealth, approximately 71% is stored in financial instruments. This means the end of the housing bubble in China has the potential to become a huge deflationary "house of cards" while in America it appears financial instruments are more likely to be our "Achilles Heel."

One possible reason that inflation has not raised its ugly head or become a major economic issue in America is because we are pouring such a large  percentage of wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Another possibility is that the dollars role as the world reserve currency and cross border money flows has acted as a shock absorber lessening the impact of our Federal Reserve policies. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate central banks have expanded the money supply.

This is all rather complex and even our terminology tends to get us in trouble, for example it is really not an "end game", but rather more of a reset with the game resuming under new rules. Another point is that inflation or deflation often has to do with how it is figured or calibrated and can fluctuate greatly. The root issue being one of relevance, meaning what something is worth in relationship to another item. This can be a difficult concept to convey, it is also hard to internalize by people seeking easy answers. We must realize "relevant values are in constant flux" and this situation is unending as we move forward. By that measure it is fool hardy for anyone to close their eyes and hope to prosper on luck when we live at a time when values can change at a blink of an eye. 

We must make a central part of our overall financial planning the idea that as we move forward we continue to replace diminishing assets for those higher up the chain. If not we risk "dying" a financial death that can come slowly, as value erodes, or quickly such as in the case where we have been scammed or robbed. As I fleshed out this post I found myself questioning exactly how much meat or relevance it contains, but the point is to bring front and center the concept that value is even more relevant than the debate about inflation or deflation. Remember it is a dangerous world out there where few people hold your financial interest above their own.

Saturday, January 17, 2015

Currency Markets Reflect Diminished confidence!


Currency markets are beginning to reflect diminished confidence in the system central banks have created. As the currency games continue to ratchet ever higher it is becoming more apparent that we are standing on shifting sand. This was emphasized when the Swiss National Bank surprised markets and eliminated its exchange-rate cap a key source of support for the euro. The euro quickly plunged 3.5 percent against a basket of currencies, the most since its 1999 debut and hit an 11-year low against the dollar, and has fallen ever since. The schemes bankers have used for years to hide and transfer debt are coming under attack, if they crumble under the assault it will culminate in a reset of the economic system across the globe. It must be noted that this will not please many people who will feel deeply abused and totally betrayed by how it is accomplished.

A Very Important Chart In Understanding The Dollar
The chart to the left is very important. Today four major currencies dominate the world stage, they are the pound, the euro, the yen, and of course the dollar. The yen and the euro are in trouble, with the pound being very vulnerable to contagion. The remaining currencies remain small bit players in the over all scheme of things. The status gained by the dollar being deemed the "reserve currency" by which all others are weighed and in someway pegged does not make the dollar infallible or guarantee it will remain strong, but the liquidity of such a large market does add a resilience to the American dollar.

John Maynard Keynes said By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. As the central banks print like crazy to control interest rates on bonds they devalue the currency. While there are not many Bond Vigilantes there are a slew of  Currency Vigilantes and they are ready to make their presence known. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed as they are a precursor to the wealth fleeing the countries that use them in everyday life. What is occurring in the currency markets has been a long time coming, the cross-border flow of money leaving Japan and Europe is one reason some stock markets have remained so resilient.

Even as the Euro-zone self destructs the death of the Yen that makes up only 3.2% of worldwide reserve holdings is more of a  harbinger of what is to come. The myth that advanced Democratic countries are immune to hyperinflation will be destroyed as the value of the Yen spirals downward. Soon after that people will realize that the Euro, Pound, and even the Dollar are not safe from hyperinflation. This means that people will want to get out of bonds in these countries as well.  This will result in a huge monetization in these countries and then hyperinflation. These four currencies make up about 95% of the Central Bank reserves backing other currencies. Faith in paper money in general will be shattered, Japan will be the first domino to fall, but not the last. The dollar is not immune, but protected by its position as the worlds reserve currency and massive size should be the last too crumble.

The way the global economy is structured the dollar is the linchpin of global fiance thus, it has guaranteed itself a place at the table until dethroned. This means that countries like Japan and China which hold a lot of American bonds or dollars will be able to offset some of the pain of a weakening national currency. Unfortunately, many countries are not in such a position, and to make matters worse countries that are mired in debt often have tied or pegged that debt to the dollar. This means a lot of economic pain if the dollar grows stronger their debt is magnified and these countries will find themselves under a great deal of pressure just to survive. Recent currency moves should again bring into focus the fact that debt does matter and raise questions as to the validity of Modern Monetary Theory that often attempts to sidestep this core economic principle.

Unstable currency markets can be a precursor to massive shifts in value and a sudden drop in confidence. It is logical to think that in such a situation insiders would be the big winners. The main reason the world has chosen a "reserve currency" is to have some benchmark to peg currency values to and lessen the impulse of countries that have accumulated massive debts to attempt to address their problems by just printing more money, This results in devaluing their currencies but often fails to address the root cause of their problem. Just printing more money is not sustainable and little comfort should be garnered from assets or pensions being pegged to future inflation because history shows promises are easily broken and rules often rewritten for what is called the greater good.

The collapse of any currency causes wealth to flee that currency and often the country of the failing currency in search of any safe haven within reach. The bottom-line is that while many people go about their daily lives giving little thought to currency valuations they leave themselves open to the whims of those that control, manipulate and play in this important area of the global economy. Ten percentage points higher or lower against a foreign currency can have a great deal of impact on how your net worth stacks up against someone across the world. This rapidly becomes apparent to anyone doing a great deal of travel or buying foreign goods. It also highlights why all of us should be very concerned where we stand when the smoke clears from the currency wars before us. While most people remain totally oblivious to these dangers do not underestimate the forces in play or the great risk of economic damage through contagion.

Because we  are all interconnected for better or worse it has become difficult to contain defaults in one country from affecting another. This is why some people have been calling for a "world currency" for years. In this respect the saying "one should never let a good crisis go to waste" means a meltdown with high levels of fear would present a perfect opportunity and catalyst to advance this agenda down the field. Remember, many people with agendas have a lot to gain when a major shift in the currency markets takes place. Even with some countries not participating in such a currency dislodging the American dollar as the world reserve currency represents such a shift.  If the world stumbles into an economic hell the noise could become deafening because people and their leaders tend to look for easy answers.



Footnote; Your comments are encouraged. Other recent articles concerning what is happening in the currency markets are listed below, also in the archives you will find several articles dealing with why inflation will win out over deflationary forces.
http://brucewilds.blogspot.com/2014/10/fed-concerned-that-stong-dollar.html
http://brucewilds.blogspot.com/2014/10/currencies-are-ious.html  
http://brucewilds.blogspot.com/2014/02/contagion-may-lead-to-new-world-currency.html

Thursday, January 15, 2015

A Bridge Over Troubled Waters, How Safe Is This Bridge?

Is Getting Across Based On Hope And Prayer?
I would be a lot more excited about what has been recently herald as good economic news if I felt it was built on a solid and stable foundation. Using the analogy of a bridge, if you are unable to get to the other side you often have a problem. A plank breaking under your feet may spell a problem and the collapse of the total structure a real disaster. Planning to cross a bridge and getting to the other side is not the same thing. If obstacles develop in the process it is possible the goal may never be accomplished.

The rate and ease at which traffic flows across a bridge can change dramatically if faith in the structure is lost or becomes an issue. Much of how society reacts is based on faith in its institutions. A very serious concern should be that many economist have lost or discounted the strong connection between savings and the important role it plays in society. This has skewed and undercut the core beliefs of many hard working people responsible for driving the economy. It is becoming apparent that higher interest rates produce a higher quality of growth. Low interest rates coupled with easy money policies increase risk and encourage a misallocation of funds by investors searching for higher yields.

How people tend to view the economy is based on the performance of prior years. This benchmark has become ingrained in us, and we always expect economic improvement. If last year was good but this year is no better the momentum is gone. Remember the quality of this growth is just as important as the quantity or the fact will come back to haunt us. We must not be distracted into thinking the long-term ramifications of an unsustainable economy built on debt and government deficit spending has much of a future. With a large number of people unemployed and living on government payouts the burden on society will become to heavy and much like the bridge it will eventually fail.

In recent years what have been considered economic norms have been altered and rules have been changed to shore up the crumbling financial foundations of countries across the world. In the past the cost of government normally included a reasonable market rate or carrying cost. This was also known as interest on the debt. As of late savers have been thrown under the bus. The free market has had less influence in determining the rates nations pay on their bonds and central banks have taken the lead. If this is not contained it leaches over into the real economy poisoning both growth and stability, and that is happening today.

Over past decades government's increased role in the economy almost guarantees that deflation will not become a major issue. I consider most of the major countries of the world to now have government centered economies and if you consider what a government employee receives as a salary as a "benchmark" wage it becomes difficult to envision a major drop in compensation to other workers. This would not be tolerated by society as non-government workers would simply stop working or seek more support from government and institutions to level the playing field. This seriously reduces the possibility of deflation, just yesterday the White House announced plans for another "stealth wage increase" in the form of a new law granting workers paid sick time.

It is important to remind ourselves it hasn't always been this way, but this can be difficult because when we look back at history the vision we see is always distorted by who tells the story. Currently, the media controlling and spreading information about the economy is linked at the hip and intertwined with the government. As we cross this bridge over troubled waters we should have no illusions that the path is sound or safe. After years of extraordinary intervention by both central banks and governments we have an unstable structure built in haste and untested. A structure built for their short term benefit and not for the people.

Today the economy of both America and the world is being forced to undergo a major transformation as mankind begins to mature. Over the last two hundred years we have filled the world with our ever growing population and shortened the distance between lands that were once far apart. These factors of change have stimulated economic growth in a positive way, but at some point devising an economic system that is sustainable long term has a great deal of merit. This would be much easier if governments stopped squandering and wasting the low hanging fruit. Optimism of this occurring should be contained to avoid major disappointment.


 Footnote; Please feel free to explore the blog archives and as always comments are encouraged. This article ties together several post I have made over the last few months. More in the article below concerning how currency markets are beginning to show concern about the future.
 http://brucewilds.blogspot.com/2015/01/currency-markets-reflect-diminished.html



Saturday, January 10, 2015

UK Economy Is Showing Cracks

British Shoppers Have Been Buying A Lot!
It seems the world continues to have an over-sized image as to the importance of the UK economy because of both their influence in the financial markets and its close ties to America. I also think a bit of an "aura" remains from the years when Britain was an economic powerhouse and the pound sterling was the world reserve currency. Currently the pound makes up around only 4.4% of world wide reserve holdings. I have written several articles about the economy in the UK and consider the country rather uncompetitive for an advanced economy and guilty of importing far more than it exports.  Its inability to pay its way in the world matters, it means they either have to take on more debt or sell their assets to the rest of the world on a large scale and this is getting harder to do.

The pound has been hammered on currency markets as of late making this an opportune time to reassess the strengths and weaknesses of the country going forward. Early last year I reported about a massive amount of money that was being poured into the UK economy. The story placed much of the recent strength from the fact that thousands of Britons were receiving compensation for Payment Protection Insurance (PPI). Most Americans reading about the pickup in Britain's economy never even heard of the PPI. The total paid out until that time had been £13.3bn or about 22 billion American dollars and constituted a huge economic boost to the country of around 65 million people.  This money entered under the radar of many economist giving the impression that the country was undergoing a strong recovery. This false illusion is now beginning to vanish and the momentum from the infusion of cash has begun to ebb.

Figures recently released show the deficit widened to 6% of national income or gross domestic product (GDP), in the three months ending in October. That means the current account deficit has been well above 5% of GDP for 15 months, which is the worst it's been since records were first collected in the early 1950s. Making the situation even more bleak this comes at a time when the UK's total debts (household, business, financial and government) are more-or-less hitting an all time high of around 500% of GDP. It should be noted that it is almost impossible to get the debt burden down when there's a large and negative current account deficit. It is important to remember, for all the talk of a revival in manufacturing, in all reality the UK would be completely sunk without its strong financial sector that bolsters the service sector. Unfortunately, it is not uncommon for the banks and trading companies that comprise this crucial part of the economy to carry a great deal of risk this makes them very vulnerable when the global economy is unstable or debt and loans cannot be repaid.

More important and the real story concerning the gap in the UK and its current account isn't about trade, it is caused by the collapse in what's could be called its "primary income", which is largely the balance between the income the country receives on investments abroad and what is paid out to foreign owners of investments in Britain. For as long as anyone could remember Britain has enjoyed a surplus on its primary income, but in the second quarter of 2012 their primary income balance went into deficit, and that deficit has become progressively worse. In the fourth quarter of 2011, the surplus on net income from investments was 0.7% of GDP, but that went negative, to the tune of 0.2% of GDP, in the second quarter of 2012. And in the third quarter of 2014 the primary income balance was in deficit by 2.8% of GDP. In other words, over three years there has been a dramatic negative swing from surplus to deficit of 3.5% of GDP in the UK"s primary income balance. 

While much of their current economic woes might be blamed on problems in the Euro-zone which have caused investments in the region to yield progressively worse returns. The overall current account deficit with the European Union was up slightly in the most recent quarter meaning for now the worsening must be attributed to a deteriorating trade picture. With the euro-zone locked in a death spiral the UK should harbor no false illusions of help from across the channel. Just the opposite, if anything they should brace for a wave of contagion that might soon sweep over its shores. Just as troubling is that their primary income balance with countries outside the EU went into deficit of $3.4bn from a surplus of $3.6bn. Simply put these investments don't appear to be able to generate a net profit anywhere in the world. As the pound weakens the country will become more competitive and be able to export more, but it will cost more to purchase all those goods that continue to flow into the country making this a no win situation.

The ugly truth is the deficit in goods has continued to increase while the economy was supposed to be "re-balancing" towards manufacturing, only a growing surplus on services has kept the numbers from becoming ugly. There was a $34.29bn surplus on trade in services, up from $31.33bn. Sadly, the deficit in goods trade was a large $47.85bn, up from $45.16bn. The only silver lining is  a recent big increase in the profits of foreign-owned UK companies, from $14.4bn to $19.4bn. This means the UK can fund its huge current deficit by continuing to sell what some see as their crown-jewel companies and other assets to foreigners,but selling off the best assets of the country is not a fix or long-term solution to their financial woes.

While currently considered relatively stable at some point the indebtedness of the UK will reach a level where foreign investors will question its ability to service or repay its debt. This is especially true if there is not a huge unexpected revival in UK productivity, or the efficiency of workers and businesses. At that point, foreigners would not wish to hold sterling causing the pound to plummet and bringing on a rout in the sterling. This would be similar to what happened in September of 1992 during what has become known as the infamous Black Wednesday crisis. So although it is extremely fashionable, especially in the the financial sectors of London to simply ignore the growing record current account deficit it has become a cancer eating away at the future of Britain. At some point this will all come back to haunt the UK and they will rue the fact they have continued consuming more than they can afford.




Footnote; Please feel free to explore the blog archives and as always your comments are encouraged. This article ties together several post I have made over the last few months. More in the article below concerning the PPT and how for a time it gave the illusion the UK was on the mend. http://brucewilds.blogspot.com/2014/02/uk-economy-flood-of-questions.html