gold is back baby!! $368+, page-5

People keep on talking of Europe as a single market. It isn't. In some areas of activity and behaviour, Europe enjoys a common market, and on the political front, enjoys commonality of political policy. However, that is where it ends.

Until such time as Europe truly breaks down the sovereign barriers that exist between different member countries (whether in the equities or bond markets, in their labour markets /laws, even in the way in which they approach matters of social policy and reform), the problems of a dis-united Europe will perservere.

Germany's problems continue to reflect an inate lack of desire to tackle the really hard chestnuts out there (ie: labour market and social welfare reform).

Germany, for the economic powerhouse that it is, remains heavily so on the basis of protectionist policies, tariff barriers (concocted in the form of trade liberalisation policies which have the inverse effect of what they actually intend), and the continuing maintenance of a similarly over-bloated public sector (in deficit), and an over-valued currency (ie: prior to the Euro).

When the Euro was launched, it was based, in the main on the strength of the German Dm. The consequence of this is that it entrenched economic largesse in Europe at the very same time as Europe was trying to transform itself.

The EU and the ECB set particular policies which were meant to reflect certain budgetary, macro-economic, monetary, and business /labour reform outcomes (ie: limiting the size of budget deficits as a proportion of GDP, etc).

Right from the outset of the Euro experience, countries such as Germany and France essentially failed the test, and have continued to fail the test, even with the passage of time.

In effect, Germany and France forced upon the EU a set of budgetary and economic parameters which they, themselves, were not prepared to meet and, in doing so, exported throughout the EU sub-optimal economic performance. Even former shining stars such as Ireland have since fallen victim to the malaise created by Germany and by France.

So, what of the future?

Most recently, Germany recorded negative economic growth for the quarter (ie: -0.22% for the quarter, or -0.9% annualised). On that basis, the dreaded word "recession" was again touted in respect of Germany. This was then followed by yesterday's details concerning a further fall in German CPI figures, this time with the dreaded word "deflation" being mentioned in despatches from the frontline.

But, nowhere to be seen was the equally revered, but otherwise dreaded, word, "reform".

If anything, the shallow weakness of the German economy and the pressure on CPI (which is good at capturing movements in the physical economy, but is not so good at extrapolating the services economy) will merely serve as another plausible excuse for Gerhard Schroeder to again delay the inevitable - the need to reform his economy, to break down the labour laws, to reform the social welfrae system, and to replace the inverted, and somewhat perverse, trade liberalisation laws that Germany currently has in place.

If the USA is at risk of deflation (given weakness in physical CPI, despite a continually high 4.5%+ services CPI), or at risk of exporting this to the world, then equally so, perhaps the EU (and especially Germany) is at tisk of fuelling inefficiency in the global economic system through maintaining inefficient, and poorly structured, economic, monetary and budgetary policies.

On balance, smoothed inflation in the USA is ~1.7% (with services inflation >4.5%), throughout the ECB policy catchment area, it is above 2% (nothwithstanding the falls being experienced in Germany), in Canada, it is nearer to 4%, and in Australia, it is above 3%. Japan continues to remain the exception to all this.

Commentators have now taken to describing falls in the inflation rate as being akin to deflation. Generally, in doing so, they tend to refer to that component of "true" inflation that is smoothed out to exclude movements in:
1)
energy prices;
2)
in financing /housing /rental charges;
3)
Government taxes and charges;
4)
food prices;
5)
health charges, etc.

The trouble with all this though is that everyone's hip pocket continues to be attacked by prising prices. What you, me, every one, continues to see and react to in terms of rising prices does not necessarily feed into CPI figures due to the vagaries of what is included (vs excluded), when it is counted (vs continually impacting), and where it is counted (vs where people mainly work, live and play).

Adjust for these distortions and people will see that inflation continues to be in place, and prices continue to rise. But the use of statistics to distort and disturb this again just proves that you need to analyse all of the detail, not just the headline.

Anyone truly wanting to argue the deflation line will also need to answer why, in much of what they are experiencing today, and again will experience, tomorrow, continues to rise in value /cost, as opposed to falling.