Ambrose Evans-Pritchard: Excess debt must go via inflation or default
Five Years On, the Great Recession Is Turning into a Life Sentence
By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, August 12, 2012
Five years into the Long Slump it almost seems as if we back to square one.
China is sufficiently alarmed by the flint hardness of its "soft landing" to talk up trillions of fresh stimulus. The European Central Bank is preparing to print “whatever it takes” to save Spain and Italy. Markets are pricing in an 80 percent chance of yet more printing by the US Federal Reserve in September or soon after.
There is no doubt that the three superpowers acting in concert can launch a mini-cycle of growth early next year - assuming they deliver on their rhetoric -- but the twin headwinds of debt-leveraging and excess manufacturing plant across the globe cannot easily be conjured away.
The world remains in barely contained slump. Industrial output is still below earlier peaks in Germany (-2), US (-3), Canada (-8) France (-9), Sweden (-10), Britain (-11), Belgium (-12), Japan (-15), Hungary (-15) Italy (-17), Spain (-22), and Greece (-27), according to St Louis Fed data. By that gauge this is proving more intractable than the Great Depression.
Some date the crisis to August 9 2007, the day it became clear that Europe's banks were up to their necks in US housing debt. The ECB flooded markets with E95 billion of liquidity. It seemed a lot of money then. The term "trillion" was still banned by the Telegraph style book in those innocent days. We have since learned to swing with the modern dance music from central banks.
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ADVERTISEMENTSona Discovers Potential High-Grade Gold Mineralization
at Blackdome in British Columbia -- 13.6g over 1.5 Meters
From a Company Press Release
November 22, 2011
VANCOUVER, British Columbia -- With its latest surface diamond drilling program at its 100-percent-owned, formerly producing Blackdome gold mine in southern British Columbia, Sona Resources Corp. has discovered a potentially high-grade gold-mineralized area, with one hole intersecting 13.6 grams of gold in 1.5 meters of core drilling.
"We intersected a promising new mineralized zone, and we feel optimistic about the assay results," says Sona's president and CEO, John P. Thompson. "We have undertaken an aggressive exploration program that has tested a number of target zones. Our discovery of this new gold-bearing structure is significant, and it represents a positive development for the company."
Sona aims to bring its permitted Blackdome mill back into production over the next year and a half, at a rate of 200 tonnes per day, with feed from the formerly producing Blackdome mine and the nearby Elizabeth gold deposit property. A positive preliminary economic assessment by Micon International Ltd., based on a gold price of $950 per ounce over eight years, has estimated a cash cost of $208 per tonne milled, or $686 per gold ounce recovered.
For the company's complete press release, please visit:
For me, the defining moment was 12 days later when yields on 3-month US Treasury bills to crashed from 3.76 to 2.55 percent in just two hours. At first we thought it was a mistake, a screen glitch. Nothing like this had happened before, not during the crashes of 1929 or 1987, or after the Twin Towers attack on 9/11.
Investors were pulling money out of America's $2.5 trillion money market industry in panic. This was the long-feared heart attack in the credit system, even if the economic malaise behind it did not become clear for another year.
The original trigger for the Great Recession has since faded into insignificance. America's house price bubble -- modest by European or Chinese standards -- has by now entirely deflated. Warren Buffett is betting on a rebound. Fannie and Freddie are making money again.
Five years on it is clear that subprime was merely the first bubble to pop, a symptom not a cause. Europe had its own parallel follies. Britons were extracting almost 5 percent of GDP each year in home equity by the end. Spain built 800,000 homes in 2007 for a market of 250,000. Iceland ran amok, so did Latvia and Hungary. The credit debacle was global. If there was an epicentre, it was Europe's E35 trillion banking nexus.
Monetarists blame the ECB and the Fed for keeping money too tight in early to mid 2008, pushing a fragile credit system over the edge. They blame "pro-cyclical" regulators for aborting recovery ever since by forcing banks to raise asset ratios too fast. They are right on both counts.
Yet the "Austrian School" is surely right as well to argue that a rise in debt ratios across the rich world from 167 percent of GDP to 314 percent in just 30 years was bound to end badly. There comes a point when extra debt draws down prosperity from the future. The future arrived in 2008.
A study by Stephen Cecchetti at the Bank for International Settlements concludes that debt turns "bad" at roughly 85 percent of GDP for public debt, 85 percent for household debt, and 90 percent corporate debt. If all three break the limit together, the system loses its shock absorbers.
"Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. Used imprudently and in excess, the result can be disaster," he said.
Creditors and debtors may in theory offset each other, but what actually happens in a crunch is that borrowers cut back feverishly. Creditors do not offset the effect. The whole system spins downwards. It is debt's fatal "asymmetry," long overlooked by New Keynesian orthodoxy.
It is how people behave, and how countries behave. Creditor Germany did not offset the squeeze in Club Med. Creditor China did not offset the squeeze in the US. The world contracted.
But why did the credit bubble happen in the first place? You could argue that it is merely the flip side of too much saving. The world savings rate has crept up to a modern-era high of 24 percent of GDP. That is the most important single piece of information you need to know to understand the great economic drama we are living through.
There is nowhere for this money to go. The funds flood into investment -- now a world record 49 percent of GDP in China -- or into asset bubbles.
So my candidate for chief cause is Asia's "Savings Glut," and indeed whole the structure of East-West trade under globalisation.
The emerging powers built up $10 trillion of foreign reserves -- that is, bonds -- in a decade. They flooded the global bond market. That is why spreads on 10-year Greek debt fell to a wafer-thin 26 basis points over Bunds in the bubble.
They also flooded Western markets with cheap goods, driving down goods inflation. Western central banks -- in thrall to inflation targeting -- cut short-term interest rates ever lower. They set the price of credit too low, forcing pension funds and insurers to hunt frantically for yield to match their books. The central banks compounded the effect.
Western multinationals played their part in this saga. They drove up the profit share of GDP to historic highs, playing off wage rates in the US and Europe against cheaper labour in China, Latin America, or Eastern Europe. That too concentrated wealth among those who tend to buy shares, land, and Impressionist paintings, rather than goods. The GINI coefficient of income inequality went through the roof, as it did in the late 1920s. It is a formula for asset bubbles.
The credit bubble disguised the exorbitant imbalances in trade, capital flows, and incomes. The game could continue only as long as the West in general -- and the Anglosphere and Club Med in particular -- were willing to run ruinous current account deficits, borrowing themselves into dire trouble.
As soon as the debtors hit the brakes and slashed spending, the underlying reality was exposed. There is too much saving and too little consumption in the world to keep growth, and people in jobs. It is the 1930s disease. On this the Keynesians are right.
None of this would have been any different if banks had been saints. The forces at work are tidal in power.
So this is where we are in the summer of 2012. The imbalances are slowly correcting. Wage inflation has eroded Asia's competitiveness. China's current account surplus has dropped from 10 percent of GDP in 2007 to around 2.5 percent this year.
Yet Europe refused to adjust. Germany is still running a surplus of 5.2 percent, down from 7.4 percent in 2007. The North has refused to offset the demand squeeze in Club Med. Indeed, Germany legislated its own internal squeeze through a balanced budget law and imposed this curse on the rest of Euroland. The effect is to trap Euroland in chronic slump, at least until the victims rebel and take matters into their own hands.
As for our debt mountain, we have barely begun the great purge. Michala Marcussen from Societe Generale says the healthy level is around 200 percemt of GDP for advanced economies. If so, we have 100 points to cut.
This cannot be achieved by austerity alone because economic contraction would tip us all into a Grecian vortex. Such a cure is self-defeating.
Much of the debt will have to be written off. Whether this done by inflation (1945-1952) or default (1930-1934) will be the great political battle of this decade. Pick your side. Pick your history.
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Prophecy Platinum Announces Wellgreen Preliminary Economic Assessment:
38% Pre-Tax IRR, $3.0 Billion NPV, and a 37-Year Mine Life
Company Press Release
VANCOUVER, British Columbia, Canada -- Prophecy Platinum Corp. (TSX-V: NKL, OTC-QX: PNIKF, Frankfurt: P94P) reports the results of an independent NI 43-101-compliant preliminary economic assessment for its fully owned Wellgreen nickel-copper-platinum group metals project in the Yukon Territory.
The independent assessment, prepared by Tetra Tech, evaluated a base case of an open-pit mine (with a mining rate of 111,500 tonnes per day), an on-site concentrator (with a milling rate of 32,000 tonnes per day), and an initial capital cost of $863 million. The project is expected to produce (in concentrate) 1.959 billion pounds of nickel, 2.058 billion pounds of copper, and 7.119 million ounces of platinum, palladium, and gold during a mine life of 37 years with an average strip ratio of 2.57.
The financial highlights of the preliminary economic assessment, shown in U.S. dollars, are as follows:
Payback period: 3.55 years
Initial capital investment: $863 million
IRR pre-tax (100% equity): 38 percent
NPV pre-tax (8% discount): $3 billion
Mine life: 37 years
Total mill feed: 405.3 million tonnes
Mill throughput: 32,000 tonnes per day
Prophecy Chairman John Lee says: "We are pleased with the preliminary economic assessment results. The numbers indicate that Wellgreen is one of most exciting mineral projects in the Yukon. The company is drilling to upgrade and expand the resource base. The infrastructure is excellent as the project is only 1,400 meters in altitude and 14 kilometers from the paved Alaska Highway, which leads to the Haines deep seaport. Discussions are under way with support from local stakeholders regarding permitting and logistics."
For the complete press release, please visit: