The downbeat news from Europe continues. First up, Bloomberg.com reports that Euro-Region Industrial Orders Decline:
European industrial orders declined the most in almost three years in September, led by Germany and France, suggesting the sovereign-debt crisis is starting to affect economic growth in the region’s core nations.
Orders in the 17-nation euro region fell 6.4 percent from August, when they rose 1.4 percent, the European Union’s statistics office in Luxembourg said today. That’s the biggest decline since December 2008. Economists had forecast orders to drop 2.7 percent, the median of 17 estimates in a Bloomberg News survey showed. Orders rose 1.6 percent from a year earlier after increasing 5.9 percent in August.
Companies may see waning orders as governments across the region toughen austerity measures, hurting domestic spending, just as exports falter.
In addition to the clear recessionary implications, one will note that the problem is blamed on the debt crisis. I would wonder if it is not equally valid, or more valid, to blame the crisis on underlying economic weakness. It’s a non-trivial chicken-egg problem. The reason is that those of us who favor sound money see inflationary biases all over. In this case, what is unseen in the wording is the inference many readers will draw, which may be as follows. People may think: ”If those Germans would just get over their little hyperinflation phobia, then the ECB and the other powers that be could just make that bad debt crisis vanish by monetizing the debts. Then the party could resume.”.
But we should note that orders are up 1.6% from only one year ago. Whether this reflects price increases or not is not known to me.
Moving on, there is a strange report also from Bloomberg.com about allowing (“imposing”) lenders to banking companies to share the pain if the company they lent money to goes bust, saying that magically next year is a safer time to present a proposal on the topic:
The European Union may delay the release of plans imposing losses on bondholders at failing banks until the start of next year to avoid them being unveiled at a time when they could add to turmoil on the financial markets …
Banks including Citigroup Inc. and Goldman Sachs Group Inc. have said that including writedowns for senior bondholders as part of the measures may make it more expensive for banks to attract funding.
Are they really going to delay this proposal because they believe that magically markets will be calm at a future point? Or is it that the financial companies have such influence that they have convinced the regulators that they cannot afford to pay higher corporate borrowing costs? I have no way of knowing who is saying what to whom on this matter, but if one believes in free markets, one is likely to be dismayed that bank holding companies are again getting special treatment.
General Motors kept functioning after its bondholders were treated very roughly. The world would keep spinning, and people would continue to exchange goods and services with each other, if similar things happened to creditors of badly run banking companies.
If risk returns to lending money to large bank holding companies, I expect that we will see them run more prudently. If so, that derisking of the financial system would help allow “risk on” to be appropriate for investors again.
Doc: I’ll note today the failed bond auction in Germany (compare and contrast to the record demand for the 7-year US government bond), rising yields and CDS in Germany, and falling yields in the US.
This is going to get uglier before it gets better…
/* before it gets better…*/
Keith – better is at least a decade away. We are in an era of deleveraging and everyone is going to choose the easy way out – print away. Nothing structurally will be solved, until the Armageddon occurs.