(Cam Fitzgerald’s recent guest commentary here, “Britain Becomes the First to Choose Deflation,” drew a heavy response – more than 120 posts in the forum. Here are some further thoughts from him concerning Europe’s turn toward austerity and the potentially profound impact of this on the rest of the world -- even on the U.S., which has yet to heave Keynesian quackery overboard. RA)

A young friend asked me yesterday, “What on earth does negative growth mean?” and I had to laugh because it really is a ridiculous term dreamed up by political economists to put a positive spin on really bad news. I had actually never given the term any serious thought until then. “It means,” I said, “economic contraction and recession.” It really is no wonder the kids cannot figure out what is going on with all the nonsense terminology flapping about.

With France, Italy, Britain, Spain and of course Greece all now seemingly embracing austerity measures to bring their economies into line with EU terms specifying deficits be no larger than 3% of GDP, they are all about to experience “negative growth”.  A double dip recession is now hurtling our way and it will affect Canada and our housing markets in a very big way. Britain itself is targeting a debt reduction policy that it hopes will see that country’s massive debt fall to 40% or 50% of GDP by the year 2030. Prime Minister David Cameron has suggested that this will fundamentally change the lives of his countrymen for years to come. He is right.

Some economists and politicians are already spinning this development as a positive change and suggesting that inflation targets and growth objectives can be met while the engine of the economy is put into idle (if not reverse). That is nonsense, of course. And it is a hazard to your financial well being to believe it. We cannot have it both ways. We are headed for a deep correction and should just start telling it like it is. There will not be inflation, particularly if quantitative easing, debt monetization and stimulus are being abandoned. It is Contraction with a capital “C” and nothing less. Negative growth is coming.

Choosing Recession…or Worse

In other words, it spells recession. It is one thing for a single member of the European Union to choose a policy of restraint in order to bring its fiscal house back in order, but quite another when all of the heavy hitters of the EU do so at the same time. We are witnessing a sea-change of events unfolding that to my way of thinking spell a certainty of a global recession if not worse. Yes, that dirty “D” word is on the tip of my tongue: Depression.

The stars are lining up and they all have the same intention. Deficit-slaying to achieve balance, maintain bond ratings, and by so doing cap the costs of interest payments on the debts in which sovereign states are drowning. It may be a good thing, but you know what they say about too much of a good thing: It kills. And in this case, it kills growth. I will not even quibble over the outcome.

This is an important cumulative set of changes, and it has not been commented on enough by the wider media. It is happening with lighting speed, too. All of the countries I mentioned are now turning their backs on stimulus and Keynesian nostrums as solutions to their economic woes. Instead they are embracing pension reform, reductions in public-service spending, tax increases, program cuts, increasing the age of retirement, cuts to social service payments, and looking at national assets that might be sold to raise cash.

Media Missing the Big Picture

There are many business writers out there, and individually they have commented in detail on the policies of one country or another; at other times discussing single announcements such as retail figures, employment, CPI and related indicators of our economic health. They are missing the big picture, though. I think it may be a case of not seeing the forest for the trees. The significance of what is occurring in Europe cannot be overstated because it spells deflation with a certainty when you consider the events in conjunction with credit being restricted around the globe.

I have said before that I do expect a significant stock market correction to take place during June and leading up to the G8 summit -- possibly even occurring as an outcome of announcements that flow from those meetings. I may be wrong, but I do suggest to any who are reading this that you take special care of your investments at this time. Being in cash is prudent right now. Backstopping is essential if you insist on staying in the wider speculative markets. Caution should be the order of the day.

The Speed of Events

We are getting signals weekly out of Europe that change is in the wind – signals that would be perilous to ignore. Europe is about to enter a period that will be marked by a major economic contraction. It will affect every country on earth. None will be immune to the ominous political undertakings there.

As I said, it is a surprise to me, the speed with which these events are unfolding, and it appears to be occurring in the absence of a media spotlight. Perhaps we have become immune or complacent when it comes to bad news? Connecting the dots is all the more difficult with distractions like the spill in the Gulf of Mexico and the Israeli raid on ships headed for Gaza clouding our media horizon and consuming most of the airtime.

We need to stay focused, though. Major events are shaping up in the background that cannot be ignored.

And they are about to bite us from behind.

***

Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts.  Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2010, Rick Ackerman. All Rights Reserved. www.rickackerman.com

-- Posted Thursday, 24 June 2010 | Digg This Article