Elite View: The Yo-Yo Economy
By Staff News & Analysis - October 24, 2012

Euro zone rot spreads to Germany, China mending … The euro zone's biggest member Germany is being sucked into the bloc's worsening economic quagmire, business surveys suggested on Wednesday, as similar data signalled the slowdown in China may be abating. The slump that began in Greece and spread to other smaller euro zone economies was clearly gripping the core in October, marking the worst month for the 17-member bloc since it emerged from recession more than three years ago. – Reuters

Dominant Social Theme: Things go up and down.

Free-Market Analysis: There are problems with Germany but the good news regarding China brings us back to emotional parity.

This seems to be the gist, the dominant social theme of this Reuters article. We're supposed to be depressed about Germany but excited about China.

The idea the Reuters article (above) is advancing is that the world is involved with a number of different economic trends. We are given to believe from such reporting that there is no specific direction, and thus no extensive conclusions to make.

This is surely a kind of power elite meme. Reuters, a mainstream media conglomerate is eager to provide us with a serial comprehension of economics rather than a holistic one. Here's some more from the article:

Markit's Composite Purchasing Managers' Index (PMI), which polls around 5,000 businesses across the 17-nation bloc and is viewed as a reliable growth indicator, fell to 45.8 this month. That was the lowest reading since June 2009, confounding consensus expectations in a Reuters poll for a rise to 46.4. The index has now been below the 50 mark that separates growth from contraction since February.

Similar PMI data for China suggested the world's second biggest economy, a key world exporter, is slowly recovering from its weakest period of growth in three years, with new orders and output at their highest in months. A comparable PMI for the United States due at 1258 GMT is also expected to rise, showing a modest acceleration in growth.

We are to conclude from all this that the world's economy, like a Yo-Yo, bounces up and down. But a realistic perspective may unfortunately tell us something else.

It is questionable, for instance, to maintain that the US is "recovering." The 2000s are like the 1970s for the US, and there was no recovery during that decade until a final interest rate blow off that raised the price of money some 20 percent. When we see sky-high rates, we'll begin to believe the US is positioned for "recovery."

Europe is similarly encumbered. The attention has been on the Southern PIGS but, in fact, the Northern regions of the EU are suffering as well, particularly Germany. Here's a little more of the Reuters article:

The manufacturing PMI for Germany … plunged to 45.7 from 47.4, also confounding expectations for a rise and well below even the lowest forecast polled by Reuters. The rate of decline was even worse in France.

"(It) reinforces concern that the economic downturn in the region may be deepening and widening," said Martin van Vliet, senior economist at ING.

The data were published just before European Central Bank President Mario Draghi was due to appear before German lawmakers for a grilling over whether his plans to buy euro zone sovereign debt might trigger inflation or compromise ECB independence.

They also coincided with the latest numbers from Germany's Ifo institute showing business sentiment in the country dropped sharply to its lowest in more than 2-1/2 years, the sixth consecutive monthly fall.

"Any hopes of a rebound appear to have been dashed for now. Germany is heavily dependent on exports so a global slowdown is going to impact on Europe's growth motor," said Peter Dixon at Commerzbank.

The question, of course, is WHERE is Germany going to export to? US consumer demand is weak and Southern European demand is surely not overenthusiastic, either, at this point.

There is Asia, of course, but Asia has traditionally taken an export-oriented stance. Chinese leaders have taken that view, as well. And recently, with the downturn in the world's economy the ChiComs have determined that they will produce for their own population rather than for outsiders.

While we question the success of this program, Reuters does not. "The HSBC Flash Manufacturing PMI rose to a three-month high of 49.1 in October but remained below the key 50 mark," according to Reuters. "'(This) adds to recent signs of stabilisation of the Chinese economy, thus underpinning our view that the slowdown in activity is bottoming out,' said Nikolaus Keis at UniCredit."

Time will tell if the world's economy is all moving in one direction or if China can continue to function as an exception. But those betting on China to fuel global growth should note that Chinese leaders have already abdicated that role.

After Thoughts

Even if China continues to grow, the rewards will not be excessive for those outside of the "dragon kingdom." In the 21st century, perhaps, there are few places to hide.