The global community is learning that you actually have to produce something to make an economy grow. That is, you can’t grow by debt alone. And to grow you need capital, real capital, not just pieces of paper printed by some monetary authority. Real capital comes from profits saved from production and labor. If you believe pieces of paper, fiat money, causes growth, then why don’t we use the “notes” from the Bank of Econophile, since they have as much validity as any other popular currency. If you don’t believe that, then ask what Federal Reserve Notes are backed by. We will produce as many notes as you think you need to spur growth. Our notes won’t work any better than the Fed’s.
Because real capital is scarce, and because the debt hangover discourages the creation of new capital, the world’s productive capacity is slowing down, including here in the U.S.A.
Two reports came out today showing what we at the Daily Capitalist have been writing about for some time, that industrial production is slowing down. Mainstream economists are putting the blame on things like the natural disasters in Japan, the lack of consumer spending, the lack of government spending, or the winding down of quantitative easing. But they confuse effect for cause.
The real cause is the destruction of capital that was the result of the fake economic boom brought about by money steroids. The economic fallout was the production of real estate that now no one wants, and that is evidence of a vast destruction of capital, real and fiat. While injections of fiat money into the economy can give the numbers a temporary boost, fiat money cannot create real wealth or production. And that is the reason today’s manufacturing reports are so negative.
Thus it is no surprise that the U.S. ISM Manufacturing Index for July continued its decline that started last April:
Here is a synopsis of the report:
[T]he Institute For Supply Management’s manufacturing index for July came in at a disappointing 50.9 vs what was an inflated 55.3 reading for June. The July index is still above 50 to indicate monthly expansion in business conditions but is now at the slowest rate so far of the recovery. New orders technically contracted in the month, coming in at 49.3 which however is only a little below break-even 50. Still, this is the first sub-50 reading since June 2009. Backlog orders contracted more deeply, down four points to 45.0 for the lowest reading since April 2009. Low levels of orders point to trouble for all other future readings including for, unfortunately, employment.
Employment, at 53.5, did expand in the month but is well down from 59.9 in June. This is the lowest level for employment since December 2009. Inventory, at 49.3, joined new orders in contraction during July. It was unusual strength in this reading that gave an unsustainable bounce to the composite index for June. Other readings include a slowing in production, a speeding up in deliveries which is a sign of weakness, and a slowing in input price inflation which, though boosting margins, is another sign of economic weakness.
Also, the JP Morgan/Markit Global Manufacturing PMI for July also showed continued slowing:
According to the Report:
The global manufacturing sector continued to cool at the start of H2 2011. Growth of production slowed to a near standstill, as levels of incoming new business declined slightly for the first time in over two years.
At 50.6 in July, the JPMorgan Global Manufacturing PMI™ fell to its lowest level since July 2009, the first month of the ongoing recovery. The headline PMI has signalled a substantial easing in the overall rate of expansion since hitting a near-record high only five months ago. Manufacturing production rose for the twenty-sixth consecutive month in July, although the rate of increase was the slowest since the opening month of this sequence.
Among the major economic regions covered by the survey, output expansion was the slowest in 25 months in the US, hit a 20- month low in India and eased to the weakest in their respective recoveries in the Eurozone and the UK (which extended to 24 and 26 months respectively). Meanwhile, the China Output Index remained below the 50.0 mark for the second month running. Japan bucked this trend, however, with output rising to the greatest extent since February.
Total new orders posted a negligible decline in July. New work fell in the US, the Eurozone and the UK. Rates of increase eased to a near-standstill in China and to the weakest in the ongoing 28-month period of expansion in India. Japan saw new business rise at a faster pace.
July data signalled that the growth rate of international trade volumes was unchanged from the previous month’s two-year low. The rate of increase eased in developed markets, whereas emerging nations saw a further modest reduction in new exports.
Manufacturing employment rose for the twentieth consecutive month in July. However, jobs growth slipped to a one-and-a-half year low that was below the average for the current sequence of increase. Employment rose at a weaker pace in the US and the Eurozone.
We believe, as unemployment rises, there will be calls for central banks to do more for the economy, and it looks like they will all resort to more monetary stimulus. We believe, in light of the budget crisis in the U.S. and elsewhere, that there will be little stomach for more “stimulus” deficit spending. That leaves quantitative easing as their only tool. Ultimately they will get the price inflation that they want.