A friend of mine sent this long and, arguably, complicated piece from CLSA Strategist on the state of the world. It is somewhat sobering. This was published Dec 12 and today I note that someone else is talking (not sure it is related to this article) about two themes: the outflow of capital in China and the effective repatriation of cash by European banks. Below is the conclusion/summary of the Napier article:
Governments are struggling to find funding. This report argues
that a move to financial repression to fund the state in Europe is already underway. With banks restrained in expanding balance sheets to buy this extra debt, they will be forced to reduce credit exposures to other states. Thus the initial move to repression tends to force interest rates higher outside the
nation state and increase the forces of deflation. This negative outlook would only be negated if banks decided to go on a lending binge and financed the national sovereign by a major balance-sheet expansion. This would negate the need to pull funding from elsewhere and the balance sheet expansion would boost money
supply. With bank capital strained and new regulations forcing
higher capitaladequacy and liquidity ratios, this more inflationary adaptation to fund the state seems unlikely.
In addition to Europe, there are many states that will struggle
to fund themselves as the baby boom generation retires. Financial
repression will increasingly be seen as more palatable than austerity, default or hyperinflation, which are the other options for a bankrupt state.
The deflationary forces from Europe’s financial repression will
be exacerbated by the deflationary impact of shrinking Chinese BOP surpluses. Any BOP deficit from China will force the PBOC to sell Treasuries and buy back renminbi. In forcing US Treasury yields higher and constricting money supply growth in China, a BOP deficit tightens global monetary policy. Deficits are not guaranteed, but the days of large surpluses, excessive renminbi printing and mass depression of Treasury yields are over.
In 2012 the peoples of the Eurozone will have to either cede
their sovereignty to the Federal States of Europe or leave the euro. It seems likely that some of the 17 Eurozone states will opt for independence. While we await the results of referendums on this issue, the ECB is likely to keep its “big bazooka” of monetary easing in the armoury and Europe’s commercial banks are likely to
continue to shrink their balance sheets. This is bad for economic activity in Europe, but not as bad as the messy creation of a new euro with less than 17members, which is were we are headed. The hit to commercial banks’ balance sheets as old euro members default through nonpayment or payment in weak currencies should signal the low for European equity