“ECB cuts interest rates, open to further action“

(Reuters) - “The European Central Bank cut interest rates for the first time in 10 months on Thursday and held out the possibility of further policy action to support the recession-hit euro zone economy.”

by Michael Burpee, portfolio manager

As we read through today’s coverage of the European Central Bank’s decision to cut a quarter point from its official interest rate, I would ask that you please consider the following:

• The Federal Reserve Board (FRB) has said that should the US unemployment rise it will increase its buying of financial debt.
• The FRB has said that should US unemployment decline, it will decrease its buying of financial assets.
• The FRB has said that American fiscal problems are holding back their economy.
• Employment in the US is going neither up nor down.
• The ECB has justified its latest rate cut by stating that the European economies needed a half-point booster shot.
• The ECB has said that it does not care that real interest rates may be negative.
• Companies reporting poor earnings growth are seeing their share prices decline as well…
• … While companies reporting stronger earnings growth are seeing their share prices improve.
• Most leading indicators in the world declined in March and April.
• Some are blaming the weather, some are blaming government policies. I point to the attitudes of governments, which are anything but business friendly.
• The current round of significant acquisitions indicates that companies still think it better to buy assets and slash jobs than to build start-up divisions from scratch…
• …Amid significant issues of primary shares and unwinding of failed investments in competitors’ shares.

I continue to monitor developments in capital markets from the point of view that all capital markets are being propped up by central banks. The reality is simply that the major economies are underperforming their historical trends. I expect this to continue through to 2014, mainly due to governments’ inability to restructure their respective economies.

The major reason for this is that sensible policies designed to reduce government debt are being countered by a culture of those dependent on government handouts. Remember, if more than half of any electorate is dependent on government subsidies, their vote will continue to support those subsidies.

The reality is that people in the developed world have become dependent on government subsidising their lifestyle. There is little need to repeat the figures which so clearly demonstrate the situation, but if you want one, here goes: 60% of Spain’s youth are jobless. Say no more.

The fact is that the Post Depression form of governing the global economy that has served us so well is no longer working. Unsustainable fiscal expenditures, together with “free” money, has caused unemployment to soar and business to under invest.

The very roots of democracy are being questioned — and for good reason.

The current conditions were predictable a decade ago.  As industry moved production to areas of lower labour costs they did not close factories in higher labour cost areas nor confront labour in those areas. Instead their governments chose to borrow and spend, thereby ignoring reality.  That imbalance came to and end in the 2008/2009 period as reality hit home.

The question now is what to do. Whatever the answer, the solution will be painful. But we cannot continue to avoid the problem indefinitely.

Best wishes,
Michael