GDP Drops in Croatia again...Recovery in sight or more pain to come?

The business portal: poslovni.hr, just released news that Croatia will continue with more negative data in respect to the GDP.

The GDP will continue falling, but moderately, as the report claims. As per the report: (the report has been translated using Google Translate, for a more thourogh view of the report please see the originial):

"The economic downturn in the first quarter is attributable to personal consumption, regardless of the slightly earlier date of Easter. Negative impact on the growth of GDP as compared to previous periods could come from net exports, in accordance with fluctuations in foreign trade, "said one of macroeconomists in the survey Hine.

Due to the recession in the eurozone, our largest trading partner, weakens the demand for exported goods, which badly affects the Croatian exports. In the first three months of this year, exports fell by 7.9 percent compared to the same period last year.

"A slight increase in industrial activitiy and construction work can hardly compensate for the decline in private consumption and exports in the first quarter," says one of ht emacroeconomists in the survey of Hine."

Of course, just as all reprots go, the main problem has been and always will be exports. It is somehow impossible that we can never get any export growth (even though there are mouths to feed in our own country). And we have the dreaded GDP figure collapsing again.

The reason why mainstream economists missed the crisis is due to the fact that they consider GDP growth to be a positive thing. I beg to differ. Remember, GDP consists of consumption, invenstments, government spending and net exports.

First of all, and pardon my logic, how is it possible that consumption and investment go on the samre axis? When constructing a GDP curve, as taught in mainstream 101 macro classes, the GDP is created by combining the nominal values of the governet spending curve (which is always in ascension), the investment curve and the consumption curve. Adding all of these, get the GDP.

As long as the belief holds that investment and spending are located on the same axis, we will continue to have recessions and bubbles in various markets. That is why I believe that if the monetary system is reformed, and we have the "peoples money" (which is nothing else but the peaceful choice among individuals to choose an object with which trade will be conducted) and a 100% reserve banking system, the GDP will not matter as yardstick of economic health. The only body that prints these figures is the governmet, a source of high competence.

The fall in GDP in Croatia might be a sign of a recovery, the washing away of excess malinvenstments that occured during the previous bubble years. But due to the fact that the government has increased their role in the economy, ballooned their public debt and used the banking system to inflate their way out of their mess, I believe that there is more pain to go.

Over the past quarters, the nations stock index (CROBEX) has shown emmence volatility, ralling and dropping (bottoming out in the current  period). This can be attibuted to the inflow and outflow of money provided by the banking system. There is no reason that the CROBEX would rally. There are no good news, no new manufactuing firms, the national debt hasn't gone done, the structural unemployment issue still remains and the governent has expanded.

The only reason that the index would rise would be to nominaly money supply growth. The fall, relates to the destuction in the money supply. That is why the GDP figure is such a horrible indicator. It doesn't take into inflation (even though it is deflated for the "official core number") and capital missalocation that it creates. The figure contains government outlays - a drag to the econmoy, or better put: expenditures that don't go in line with consumer preferences). And finally: Any GDP growth with rising consumption and investment sums up to bogus growth. Or growth that is financed by money expansion and not real savings.

So, we may conclude that there is a recovery in sight somewhere in the economy, probably being reinflated as we speak, and yes there is more pain to come - as long as the government keeps the productive economy in a strangelhold with the assistance of the banking sector, there will be more pain.

Why would an auditor miss a bank run?

I have decided to write on this topic because I currently work as an auditor. I have been up to this date in many firms where i conducted audits of the firm's financial statements and through various ways have "tested" the company's balance sheet's to determine any wrongdoing.

The thing that caught my eye was the fact when an auditor approaches a bank, the audit procedures in my opinion somehow breakdown. This is due to the fact that manufacturing firms have to sell a product and pay off suppliers to remain in business. A bank creates money from loaning out demand deposits and captures a spread.

The main difference when going about on audit of a mancufacturing company and a bank, is the perception of the person conducting the audit. The primary focus on a manufacturing firm is the ability to generate cash flow and the unbiaseness of the accrual process. When auditng a bank, most of the itme is focused on bank product of the bank - its' loans (for traditional markets this is the case).

If the loan receiver has a hard time paying of the loan, the auditor will quesiton the vaildity of the asset and request an impairment of th asset. The auditor however never questions the origins of the loan. By this I mean the systemic imbalance of borrowing short and lending ex nihilo long. The auditor is never concerned of any bank run due to the modern nature of the banking system.

I found this particularly odd. The only logical conclusion that I come by is the perception of the participant doing the audit, and the repetitiveness of the process. The participant views the fractional nature sound because a supranational (central bank) is stranding behind the Entity making sure that the diminishing reserves to cover the deposits is in line with "historical practices", or in line with industry and economic wide conditions.

This can be clearly seen at the examples in Cyprus a month ago, when the banks run ensued. I am sure that each bank that went under in Cyprus had an auditor. The auditor went through their books and determined no material misstatements of the banks' balance sheets. The other problem that would arise is the going concern basis: If the bank was unable to honor it's depositors for withdrawl on demand, then the bank would have been prepared for a banckruptcy filing. This hasn't occured as well. It is if the auditors were fooled or something; unable to see that the bank is always insolvent and can be brought to it's knees with a run.

The bottom line is this: An auditor can't see a bank run, because he is not interested in one, nor do most of them have any knowledge of economic theory underpinning their analysis. If they did have knowledge of economic cycles they would have made an adverse opinion of the statements during the boom faze, when the percentage of NPL's (non performing loans) is at a low in the cycle.

Unfortunatley, the common practice is to follow the mainstream approach and give a green light. Anyone that stands out will be attacked as reactionary and insance. Just as the rating agency Egan-Jones was called to b mad when they downgraded US debt and other debt for that matter.

There should be first of all an overhaul of the banking practices, and then an auditor will be able to make decent calls just as they do for manufacturing firms.

Why capital accumulation is important and how it effects the price structure

 

The title of this blog post is directly related to a key tenant in Austrian economics, which says that the joy of consuming wealth is derived from the self evident supply of given good or rendered service X,Y,Z.  We shall skip the semantics regarding resource transformation to fulfill this desire.

The primary goal of creating any supply of capital is to sustain the individual for a lengthy period of time in order for him to complete other tasks he deems satisfactory or necessary to bring him in a state that he strives to. Capital accumulation in a free market is a wonderful process because it is based on voluntary compliance of a mass of individuals, each seeking its own end.

This process is disturbed when a self appointed entity with a monopoly on the judiciary system can appoint how and what resource may be effectively employed in a certain endeavor. This entity compounds the problem when it, through the banking system, legalizes the counterfeiting of the currency through fractional reserve banking, creating an artificial boom in the capital goods industry and subsequent inflation.

According to business.hr, the inventory of the manufacturing industries fell 12,3% YOY. While this may be a bullish sentiment for commodity broker dealers, who may just take a long position in a certain commodity and with the same demand dynamics that prevail YOY expect to profit from a spike in inventory products, this is bad for the average consumer, because it will eat away a part of his income when purchasing the final product.

Unfortunately, this is what happens when the economy is shaking of the addiction of cheap credit from the banking system. When the boom faze is over, the manufacturers are forced to dump their inventory onto the market at deep discounts in an attempt to salvage themselves from insolvency. Sometimes, they go under. The subsequent step in this process, is the curtailing of expansion, brought by lower inventory levels.

Some of this inventory had to be sold at a deep discount, as some inventory, due to the artificial boom, have been used in an accelerated manner as the boom faze continued, as more often in industries where day were wasted in suboptimal projects. So, now, it will take time for these stocks to be replenished.

If the government stays out of this process, the recovery will happen sooner than later. If the government interferes in this process through subsidizes of purchases or outright price controls, there will be even less inventory numbers YOY.

The market has to clear. The malinvestments must be liquidated and capital must be freed in optimal projects. If the government inflates it will only lead to more resource consumption and with that lesser inventory numbers.

To reiterate what was said at the beginning, capital formation makes economies tick. A greater unused level of inventory that is known to satisfy future demand in certain industries boosts the economy. Artificial credit gives a artificial boost and excess inventory consumption.

The government better let the market clear and make it easier for producers to sell their products in lines of production which are most profitable for them. Until that happens, expect more inventory volatility…