Quote of the Day: Europe is Drowning Under the Cost of Welfare Bills

A debt crisis in Europe seems inevitable. Reason? Exploding costs of welfare politics.

Telegraph's Matthew Lynn explains:

Europe’s welfare spending is out of control, and is on a scale that is both lavish and unaffordable compared with the rest of the world. There is a problem, however. Neither she, nor any other political leader in Europe, has the will to do anything about it.

Eurostat, the statistical agency of the European Union, has this week published updated figures on the total welfare bill across Europe. It is rising, and in some countries is getting up to a quarter of national output. Meanwhile, the percentage of spending on stuff like infrastructure or education, which increase an economy’s potential output, is falling.

So long as that is true, it is very hard to see anything other than a bleak future for any of Europe’s economies.

If you dip into the blogs, there is a mildly entertaining debate about whether Merkel’s often-quoted figures are correct. On close inspection, it turns out that nations that make up the EU currently account for 7.2pc of the world’s population and a shade over a quarter of total output. When the World Bank crunched the numbers on social spending, however, it found that in fact Europe accounts for a massive 58pc of global welfare spending.

What is certainly true is that Europe’s welfare budget has turned into a juggernaut that is careering out of control. On the World Bank data, the United States accounts for 18.8pc of global welfare spending, as you might expect from the world’s biggest economy. But Germany, around a third of its size, currently spends 12.5pc of the global total. France, a smaller country still, accounts for 9.9pc. The UK racks up close on 7pc. Contrast that with some far bigger, and faster- growing, countries. China, with 20 times our population, accounts for 2.4pc of the total. Russia accounts for 2pc and India just 0.6pc.

According to Eurostat, the total cost of welfare across the EU now amounts to 19.5pc of total GDP, compared with 17.5pc as recently as 2006. If you restrict that to the eurozone countries, the total rises to 20.5pc. In Denmark and France it is now close on 25pc.

For all that the Left complains about austerity in this country, our total spending on social protection is only slightly below the European average at 16.5pc of GDP. In controversial areas such as disability benefits, where the Government has now abandoned some modest cuts, we are in line with the EU average, spending 2.8pc of GDP. (Our welfare bill is only less than average because a fantastic performance on job creation means we spend just 0.2pc of GDP on unemployment, compared with a eurozone average of 1.8pc, and 2pc in a country such as France).

Overall, in almost every country, it is going up. With ageing populations, that is hardly likely to decrease – poverty-stricken Greece is now spending 15pc of GDP on pensions, and Italy 14pc. Europe is literally drowning under the cost of its welfare bills.

War on Commodities: Intervention Phase Worsens and Spreads With More Credit Margin Hikes!

[This post, which I published last May 10, seems to have vanished from my inventory of articles. Perhaps this could be an unintentional omission as part of the patching of the technical glitch, or the alternative, I don’t like to think about it. Nevertheless I am reposting it, but with slight revisions. Anyone who has a copy of the old post pls resend to me benson.te@gmail.com. Thanks]

So the mainstream picks up on the war being waged on commodities.

For politicians it’s all been about political correctness, thus any deviances or incorrectness must be faced with 'discipline'.

Bloomberg’s Matthew Lynn writes, (bold highlights mine)

The battleground that matters most for the banking and finance industry right now is the profits it is making from commodities trading.

Over the last few days, prices have been bouncing all over the place, a reminder for everyone of just how unstable the market in food and raw materials has become.

Now there is a backlash building. The banks should take note of that. If they don’t, they could easily be driven out of this business -- and they will only have themselves to blame.

Investors held a record $412 billion of raw-material assets at the end of March, almost 50 percent more than a year earlier, according to estimates by Barclays Capital. Trading in futures and options contracts is rising rapidly. For banks and fund managers, it is a lucrative business. And the more volatile it is, the more profitable it gets.

Not everyone is happy about that. Last month, Barclays Plc was targeted at its annual general meeting for its trading profits in food commodities. The World Development Movement, a London-based group, claims that Barclays may be making as much as 340 million pounds ($554 million) a year from “food speculative activities.”

That may be exaggerated, but there will be plenty of sympathy for that view. French President Nicolas Sarkozy has blamed speculators for pushing up food prices. The European Union’s financial services commissioner, Michel Barnier, is even calling for limits on trading in commodities...

It would be easy to dismiss those protests as nothing more than the complaints of a few anti-business fringe groups and grandstanding politicians. Easy, but wrong. In reality, there is a serious issue here. Speculation in commodities isn’t like trading in financial instruments. People don’t eat Nestle SA shares. They don’t need Treasury bills to keep their factories running. The prices of those instruments can jump around like crazy without it affecting people’s lives.

But when the price of wheat or copper soars, it makes a big difference. Some people can’t afford to eat anymore because food is too expensive. Companies that used to be profitable start losing money and firing workers because the cost of their raw materials has risen so much. If they think the banks are to blame for that, they will be angry.

As I have been saying governments have been so predictable;

First governments inflates, then blames everybody else.

Then they apply propaganda to justify their actions.

Next they’ll impose price controls in the hope that edicts will be able repeal economics.

Eventually reality catches up and the facade collapses.

And as we have been pointing out inflation and price controls are like (fraternal) twins. Fraternal because both emanate from government policies, however one aspect is monetary while the other is administrative or fiscal.

Now the propaganda-price control stage is getting clearer

And this has been part of the slew of propaganda being tossed out by the Fed which for me constitutes part of the ‘signaling channel’ conditioning for the next QE.

Here is a Fed study which attempts to show that the link between US dollar and inflation has been fading.

From the Wall Street Journal Blog,

Currency weakness leading to higher import prices is a hallowed cause-effect connection for economists. But it’s a link that may be eroding...

Certainly, import prices have increased as the dollar has weakened. Over the year ended April, the trade-weighted value of the dollar fell about 6%, while the prices of non-oil imports increased 4.3%.

Much of the price gain, however, reflects higher costs for imported commodities and supplies. The prices of imported capital and consumer goods — items that feed more directly into broader U.S. inflation measures — are up only about 1% over the past year.

Economists at the Fed have looked into the link between exchange rate and import prices. What they found is the pass-through effect from a weaker currency eroded from the 1980s into the early 2000s.

What’s behind the looser link?

One reason, the economists theorize, is that a greater share of imports are goods with prices less sensitive to currency movements. For instance, Apple — not the forex market — sets the price of iPads.

Also, companies are more able to hedge against currency moves or shift production and supply sources around the globe.

Another reason for the erosion is China dominance of the U.S. import market.

With all the gobbledygook, we should start believing them. Unfortunately technical gibberish won’t supplant the law of economics. Printing more money relative to actual output of goods and services will lead to HIGHER prices.

And that’s what’s been happening.

Yet if you look at their chart which tries to identify the so-called decoupling, it simply is not there, see the trend lines I drew—red nominal imports; blue trade weighted US dollar.

The immediate effects may not be as strong as the previous, but it doesn’t mean the current divergences should translate to a deepening trend.

One development which may induce this temporal decoupling would be by intervention via the financial markets, which is what the governments been doing now.

The charts above reveal that prices of non-commodity imports have been rising.

Then Northern Trust notes,

Prices of consumer goods excluding autos increased 0.4% in April and are up 0.6% from a year ago. Prices of autos have risen 1.8%, while that of capital goods have increased 1.0%. The import price index of manufactured goods posted a 5.5% increase in April.

At the present time, the upward trend of non-oil import prices reflects the impact of a weak dollar. It is conceivable that these prices will be more threatening as demand gathers steam.

So politicians in realizing these, appears to be in an intense denial, thus the transition towards the psy-war and intervention phase.

It should be a reminder that denial and anger is part of the human psychology when undergoing substantial stress.

This can be seen in the Kubler-Ross Grief cycle.

Of course the intervention phase, so far, has not been directed at the consumer level, but as pointed out by Mr. Lynn, rather through the financial markets.

The desperate attempts to control commodity prices have been worsening.

Notes Tyler Durden of Zerohedge.com, (bold emphasis mine)

CME goes full retard, and is now seriously threatening to destabilize the clearing structure of the market with what appears a panicked margin hike every single day in one or more commodities. Among today's products impacted RBOB and RBOB crack spreads, up by 21% and 50%, respectively, as the CME makes it all too clear which products the Obama memo said need to be killed post haste.

Changing rules of the game won’t change the outcome.

As the great Professor Ludwig von Mises presciently wrote, (highlights mine)

The public discussion of economic problems ignores almost entirely all that has been said by economists in the last two hundred years. Prices, wage rates, interest rates, and profits are dealt with as if their determination were not subject to any law. Governments try to decree and to enforce maximum commodity prices and minimum wage rates. Statesmen exhort businessmen to cut down profits, to lower prices, and to raise wage rates as if these matters were dependent on the laudable intentions of individuals. In the treatment of international economic relations people blithely resort to the most naive fallacies of Mercantilism. Few are aware of the shortcomings of all these popular doctrines, or realize why the policies based upon them invariably spread disaster.

These are sad facts. However, there is only one way in which a man can respond to them: by never relaxing in the search for truth.