Ernst's Economy in discussion at BNR Newsroom: Kees de Kort on inflation, low interest rates and the Japan Scenario.

Last Monday, 17 June 2013, I was present again at BNR Newsroom, the semi-live Talk Radio show with its distinguished host Paul van Liempt.

Guests of the evening were, among others, the famous and savvy Dutch macro-economist Kees de Kort of BNR News Radio and Jeroen van den Broek, head of the Credit Strategy department of the ING Groep N.V. (INGA: NA), the largest bank and only global SIFI-bank in The Netherlands.

At the start of this week’s BNR Newsroom episode, the main topic of the discussion was formed by the developments at the international bond markets, where - according to some insiders - broad interest rate hikes seem to be imminent.

Kees de Kort, who is never short of breath AND a well-founded opinion, shared his unique insights about these developments at the bond markets.

Due to the quality and the interest of it, I print a full transcript of this discussion between Paul van Liempt, Kees de Kort, Jeroen van den Broek and Ernst’s Economy. The integral radio show can be heard at BNR News Radio:

Paul van Liempt: we start with the following thesis

‘The end is near for the extremely low interest rates at the bond market’

Paul van Liempt: The interest rates dropped for thirty years, and consequently the bond rates rose during this period. How long will it take before the bond market is finally down and out, due to these predicted interest rate hikes?

Paul van Liempt of BNR Newsroom
Picture copyright of : Ernst Labruyère
Click to enlarge 

Kees de Kort: I am not so convinced that the interest rates will rise again. Central banks all over the world (The US, Europe and Japan) managed to bring the interest rates down during the final moments of the bull market. These lower interest rates made it easier to roll over state debt and enabled the banks to earn some extra money.

What they also did, was lowering the offering costs of what we could call the foundation of the risk construct, the sovereign bond. This made it extremely cheap for governments to create new debt, due to the low yields for owners of these bonds. 

The consequences forced a large number of investors to buy other investment tools, as T-Bills and sovereign bonds, as well as 'saving at the bank', didn't yield anything.

Consequently, many rate increases at the international stock exchanges aren't based on fundamental improvements within the real economy at all. To the contrary, these rate hikes are mainly caused, because investors asked themselves: "what can we do to earn a few extra bucks?"

Kees de Kort at BNR Newsroom
Picture copyright of : Ernst Labruyère
Click to enlarge

So, if these days the interest rates on T-Bills and Sovereigns would suddenly go up, then this whole risk construct, with the sovereign bonds as its foundation, will start to shake. 

Not only sovereign bonds would depreciate in value, due to the rising interest rates, but also stock, Commercial Real Estate and other investments which were bought by investors, as an alternative for sovereign bonds. You name it...

Besides that, rolling over state debt will also become much more expensive. This will have serious negative consequences for the debt position of states.

Summarizing: theoretically, the interest rates could go up, but I don't think that the Fed, the ECB and central banks dare to make this bold move.

Then there is the 'story of Japan': what happens today in the US and Europe, has many parallels with what happened in Japan about 15 years ago. The interest rates in Japan have been extremely low for a very long time. I don't say that this scenario will happen in Europe and the US, but it might after all.

The interest rate could meander around the 1.5% to 2%, without large rate hikes, for a very long time, just like in Japan.

Paul: Jeroen van den Broek, when I ask you if the end of the low interest rates at the international bond markets is in sight, do you have the same doubts and fears as Kees?

Jeroen van den Broek: We [the ING Groep N.V. - EL] do indeed have more or less the same doubts as Kees about rate hikes. I am head of the Credit Strategy department of ING. Our competence lies clearly in corporate bonds. Our macro-economists advise us that the official interest rates and the general growth might remain low for a considerable period of time.

Jeroen van den Broek of the ING Credit Strategy dept
Picture copyright of : Ernst Labruyère
Click to enlarge

Most of our reasons for this forecast on our behalf have just been mentioned by Kees.

Kees: And there is one more reason. Growth does not improve yet and the inflation is already dropping for quite some time now. Normally, inflation and interest rates are closely connected. Currently, the inflation is very low and the direction of the movement is still downwards. This is one more reason why the interest rate is not likely to go up shortly. It is my opinion that the interest rate will remain low for a number of years.

Ernst's Economy: Are the low interest rate not a trap, where you can get in quite easily, but from which you can't get out anymore? When a central bank chairman first lowered the official interest rate for a number of times and then wants to raise it again, this will have an immediate negative effect on the economic growth, won't it?!

Kees: The central bankers are stuck between a rock and a hard place! If they raise the interest rates, the economic growth will diminish and it will be much more expensive to roll over state debt. On top of that, the risk construct changes, like I explained before.

However, when the interest rates remain low, which is the situation that we are in today, these low rates will lose their effect on the economy. To be perfectly clear, the results of the current low interest rates and the cheap money for the economy have not been very dramatic, to be honest.

Europe (i.e. the ECB) did a lot to help the economy, with very mediocre results. The US did even more and only managed to get some moderate growth at very high expenses. Also Japan went through years and years of low interest rates and the results are still very disappointing. Like you stated before, we went into the trap and can't get out of it, now. What can we do now?!

A choice must be made between these two evils and both options are extremely unpleasant.

Ernst's Economy: On the other hand, the governments of Europe, Japan and the US printed many billions of Euro's and Dollars in order to increase the money supply in the economy. Will all this excess cash not act as a flywheel that eventually spurs inflation and consequently enables a hike of the most important interest rates?!

Kees: if this would be true, then Japan would already have an inflation of 100%. You should look at what happened in Japan since 1989. Then you will see more and more parallels: large deficits, 'free' money, kicking the can down the road when it comes to problem solving. The interest rate is still low and there is still deflation in Japan.

Money should be spent, but this doesn't happen in Japan. There is this beautiful metaphore: You can bring a horse to a water source, but you can't force it to drink. The money is there, but it is stuck at the banks in Japan. These banks buy sovereign bonds and thus roll-over the state debt, instead of pumping this money into the economy.

And as the saving's rates remain so low in Japan, other people there don't want to save money, but instead buy stock, commodities, gold and silver.

Paul: In other words, Japan is already so much further on this road. Does that automatically mean that in Europe and the US this same proces will take such a long time too?

Kees: At any given time, governments can do something about this process. The question is, however: what are they going to do, actually? Raising the interest rates? In Japan, the recipe for the politicians has been over the years: kicking the can down the road, in order to buy time.

They actually managed to do so: things didn't get worse, but they also didn't get better. Japan remained in a stable situation.

The foundation of my story is: there is too much debt in the society. State debt, mortgage debt, debt on loans. Not only in The Netherlands, but in all countries. What do we do about that?

In Japan, politicians were very reluctant to do anything about this huge national debt. They chose for a scenario of 'muddling through the crisis'.

Jeroen: Don't you think, Kees, that inflation could be very healthy, actually?

Kees: With everything that we do, there are winners and losers. People with high debt do like inflation, as it reduces their debt by making it less valuable. On the other hand, many people have a fixed income and they don't have much debt. For these sensible peope inflation is a punishment, as it erodes their possessions.

Do you want to bring these people to their knees with high inflation, in order to save the people that did crazy things? That is a moral dilemma.

On top of that: Japan is already trying for many years to spur inflation, but until now with very little success.

This was the end of the very valuable discussion at BNR Newsroom on this particular subject.

Summarizing: Kees de Kort and I almost totally agree in the matter of the future development of bond rates, as a consequence of the official interest rates, set by the central banks. Low interest rates are like 'Hotel California': you can check in any time you want, but you can never leave!

Ben Bernanke, the chairman of the Federal Reserve, did yesterday a very brave attempt to ‘start with finishing’ the massive Fed support of the financial markets in the United States and beyond. However, the reaction of sheer panic at the financial markets everywhere over the globe, shows that the financial markets and the general economy are not ready at all for these kind of economic measures.

What in a normal world should be good news (“the patient recovered sufficiently and doesn’t need his drugs anymore”), turned into extremely bad news for the financial markets everywhere. This was exactly the kind of over-reaction that a drug addict shows, when his favorite dealer quits delivering the dope.

May this be a warning signal for all people who think that the interest rates may go up very soon. There is a considerable chance that they won’t and that the current situation at the bond market may continue for a long, long time.

In the coming days, I hope to print more snips from this BNR Newsroom broadcast, including some other questions by Ernst’s Economy for You.However, this depends on the rest of the news in the coming days. 

Nevertheless, everybody who understands Dutch is strongly advised to listen to the integral broadcast of BNR Newsroom, as it was once again a valuable listen.

The 21st Century’s great depression: Has ‘the great reset’ in The Netherlands finally begun? Pt II

[This article continues the first article that has been printed here]

In the European Council and Commission, nothing serious had been done about the euro-crisis, besides from a number of pseudo-solutions that were all meant to gain time, as the real solution would be too painful for every party.

Domestically, in The Netherlands, nothing had been done about the housing and Commercial Real Estate (CRE) markets. These markets suffered from a serious failure in demand and - subsequently - a strong decline in housing and CRE rental and sales prices.

Painful, but curative measures for both markets where pushed aside by the politicians, as these measures would harm certain influential interest groups among their grassroots. Deploying measures, like the following, would probably diminish their chances for re-election:

• Abandoning the mortgage interest deductability through a 5 – 10 year transitional phase; 
• People with excess mortgages would be gently forced to diminish their debt, by using the current tax deductability amounts as a special subsidy for ‘mandatory’ mortgage amortization;
• Declaring a building stop for new CRE-projects, coming from central and local governments, which didn’t come with contracts or ‘letters of intention’, signed by the future owners or tenants;
  
• Enabling the deployment of refurbishing or demolition projects for structurally vacant CRE;
• Enabling firm reorganizations among challenged companies in the Building and Construction industry, thus reducing the excess capacity in this industry and giving healthy companies a better chance for survival;
• Starting retraining projects for excess workers in the B&C industry;

Instead the Dutch politicians decided to combinedly kick the can down the road, with a long series of non-effective measures, merely meant as a smoke-screen to distract attention and gain valuable time, hoping that the crisis would "magically" disappear.

Also in other industries the problems had been mounting: the retail industry suffered from a structural excess capacity in shops and shopping space, while at the same time many local governments persevered in building extra shopping centers. On top of that, the uniformity and dullness of almost all shopping centers, in combination with the soaring parking costs, made these centers less and less attractive for fun-shoppers.

At the same time, the Dutch people held their hands firmly in their pockets, both risk-averse and worried as they were for their own future and that of their employers.

Important industries, like the ICT-industry, the trade industry, the business and facilitary services industries (cleaners, maintenance people, waste processing), the Transport & Distribution industry and the financial industry suffered from a structural excess capacity, as these industries were still adjusted to the ‘exuberant days’ of 2007.

At the same time a higher percentage of jobs in these industries were fulfilled by less expensive workers from low wage-countries, like the Eastern European countries, India, China and African countries, like f.i. Nigeria. Both circumstances worked like a double whammy towards the more expensive, Dutch workers in these industries.

Also industries which historically had been dependent from exports to the other (peripheral) countries in Europe, showed in general disappointing results: suppliers of raw materials and semi-finished products, the agricultural industry, the manufacturing industry and (again) the transport & distribution industry.

These circumstances, in combination with the enduring uncertainty within the Euro-zone, caused that – after a quite promising start – 2011 ended in misery. On top of that, 2012 and 2013 became even worse, when it came to mass lay-offs, bankruptcy cases, rising taxes, rising unemployment and pessimism among consumers and employers.

In my opinion, the great reset in The Netherlands has indeed begun in 2011!

I dare to say that that the 2008 recession is now turning into a full-blown depression. To put it even stronger: this recession had the brand ‘depression’ written all over it from the beginning: the structural imbalances everywhere on the globe had just been too large to be straightened out by a simple three year ‘bread and butter’ recession.

Nevertheless, it would be too easy to declare that the Dutch government – although the various cabinets have been generally weak over the last 10-15 years - is mainly responsible for the build-up of this depression in The Netherlands. 

The influence of most governments on the economy – especially in a small country, like The Netherlands - is quite limited. Even the European council and commission could not have preserved the European economies against this recession-turning-depression.

If I would have to point at the single most important factor for this huge crisis, the words would be ‘ubiquitous debt’: private debt, public debt, sovereign debt and corporate debt, as a consequence of nearly 'free' money.

And if I would have to blame a few persons for this massive occurance of excess debt, it would be the reckless people that tried to stop healthy recessions from emerging, by lowering the interest rates to the bare minimum: especially Alan Greenspan of the Fed and his peers all over the globe are at my crosshairs in this matter.

Remember the analogy of the forest fire from the first part of this article: as a consequence of their activities as fire extinguishers during the last ‘designated’ recessions (i.e. Russian currency-crisis, the dot-com crisis), they were able to stop those recessions in the cradle. However, they ultimately caused the massive forest fire that we are in, right now, by lowering the costs of borrowed money and by destroying the sense of risk in the financial world! The reckless lending and borrowing within the Euro-zone to countries that couldn't afford it, did the rest!

The one and only big advantage of this massive forest fire is that it burns away all the waste and combustable material, that was laid upon the financial/economic soil. 

When this crisis is finally over, all exuberance, reckless building up of debt and conspicuous consumption among people, who cannot afford it, will be over. This is a tough, but eventually very healthy proces.

If you think that I am too negative, then let us take a look at a few snips from a recent report from the research bureau Motivaction (www.motivaction.nl) and a few data and charts from the Dutch Central Planning Bureau (www.cpb.nl), the Central Bureau of Statistics (www.cbs.nl):

Sobriety among the Dutch

Dutch people increasingly accept the diminished prosperity and the new austerity of today. More than one third of the population (34%) voluntarily chose to lead a life of more sobriety, according to the Mentality Monitor of research bureau Motivaction.

Fifteen years ago, this percentage was 23% and the society as a whole was much more materialistic than today.

Possession became less important. Sharing a car or other material items became more and more common. Making choices and doing more with less money is one of the trademarks of this time, is one of the conclusions of this investigation.

The number of Dutch people that adjusts to this new reality increases rapidly. A bigger self-responsibility and a smaller dependency upon the government is endorsed by 43% of the population.

And here is the Central Planning Bureau with their June, 2013 forecast of the Dutch economy for 2013 and 2014:

June projections CPB are bleak

The Dutch economy this year is projected to fall by 1%. For next year, a slight recovery is projected, leading to a 1% increase in GDP. The budget deficit by 2014 is expected to be 3.7%. This is the second forecast made in 2013.

Household consumption in 2013 will decline, due to lower disposable income levels and decreasing house prices, while public spending also will continue to decline as a result of ongoing spending cuts. The slight recovery projected for 2014 is related to Dutch exports benefiting from recovering world trade. 

Domestic spending levels will hardly contribute to next year's growth.

The situation on the labour market is bleak. Employment will drop this year by 1,25% and in 2014 by 0,5%. At the moment, unemployment levels are rapidly increasing. In 2012, the average unemployment level concerned 5.3% of the labour force. In 2013, this will grow to an average 6,75% and in 2014 to 7%. 

This weak labour market has a downward impact on wage levels. Contract-wage increases in the market sector are expected to lag behind inflation, for both these years. In the public sector, they will lag behind even further in 2013, as wage levels in this sector have been frozen.

The economic decline in 2013 will dampen tax revenues and increase unemployment benefit payments. However, as a result of sizeable spending cuts and tax increases, the government deficit is still projected to decrease, from 4.1% of GDP in 2012 to 3.5% this year. Further increases in unemployment benefits are projected for next year, which will contribute to the government deficit increasing to 3.7% of GDP in 2014.

In my opinion, this forecasts by the CPB is still overly optimistic, as the CPB forecasts have often been during the last years. Still, they are a tell-tale signal of the current depression.

Want more?! Here is the Dutch Central Bureau of Statistics:

Number of bankruptcies exceptionally high

In May, 796 businesses and institutions (excluding one-man businesses) were declared bankrupt. This is the highest number since the time series started, in 1981. In April, 694 businesses and institutions were declared bankrupt.

In May, the most substantial increase was recorded in the sectors trade and business services. In the construction sector, on the other hand, the number of bankruptcies hardly changed.

The three-month moving average was 733 in May, compared with 721 in April. In March, the three-month moving average was 734. This, too, is the highest level since the beginning of the time series in 1981.

One in ten large companies relocate activities abroad

10% of large companies in the Netherlands moved business activities to another country in the period 2009-2011. Lower wage costs were an important factor in this respect. In the space of three years, 18,000 jobs have been relocated abroad.

The main motives for relocating business activity are to reduce wage costs and strategic decision by the parent company. The latter relocations are undertaken by subsidiary companies at the behest of the Dutch or foreign-based parent company. Another important reason reported by companies was cost reduction other than wages

Exports shrinks

The volume of exports of goods was 2.7% lower in April than twelve months previously. Exports decreased for the first time since October 2011. The volume of imports decreased by 0.2% in April; this is in the same order of magnitude as in March. Volume figures are adjusted for the number of working days.

The value of exported goods totalled 34.6 billion euros, 1.9% down from twelve months previously. The value of imported goods decreased by 0.7% to 31.1 billion euros, resulting in a trade surplus of 3.5 billion euros, a decrease of 0.4 billion euros compared to April 2012. These value figures have not been adjusted for the number of working days. April 2013 had one working day more than April 2012.

Large drop in turnover for car and motorcycle trade

Turnover in the Dutch car and motorcycle trade was almost 17% down in the first quarter of 2013 compared with the same period last year. Similar developments are being observed in neighbouring countries. Businesses in this sector expect the decrease to continue into the second quarter.

The decrease of nearly 17% in the first quarter of 2013 is the largest turnover fall in the car and motorcycle trade since the second quarter of 2009. No branch within the sector  managed to escape the economic malaise. Turnover of companies active in trade and repairs of both cars and motorcycles dropped sharply.  The falls of 17 and nearly 20% respectively, were the largest ever measured in these branches by Statistics Netherlands. Car importers, too, faced lower turnover levels: 23% down on twelve months previously.

Retail turnover 0.6% lower

Figures released by the CBS today show that Dutch retail turnover was 0.6% lower in April 2013 than in the same month last year. The volume of sales fell by 2.7%, retail prices were 2.1% higher.

This 0.6% figure is not very impressive. However, it gets more impressive when you reckon that sales prices increased by 2.1%.

And if this crisis enforced two developments in the Dutch retail landscape, it would be these:

• Outlet’ turned from a fashionable buzz-word in 2003 into an ubiquitous presence in the Dutch retail landscape. People go for bargains in almost every part of the retail market. 
  While a happy few still spends loads of money in the expensive flagship stores of the famous luxury brands, Jan Modaal (the Dutch Joe the Plumber) spends his hard-earned euro’s in the outlet and bargain stores, irrespectively whether these are online or brick-and-mortar stores: buying more for less. Consequently, there has been tremendous growth in the amount of outlet and bargain stores everywhere.
• Especially the fashion and footwear retailers got into a situation of “sales throughout the year”. The large retail stores try to smoke the small retailers “out of their holes”, by quicker replacing their collections and putting the old ones in the sales. The small retailers can’t do anything, but reluctantly follow, while they see their margins go up in smoke.

Please be aware that these data is all from the last two weeks.

All these data combined, in combination with the soaring Dutch unemployment and the accelerated drops in housing and CRE prices, show no signs whatsoever that the depression will be over soon.

To the contrary, it will presumably gain momentum this year and especially in 2014: the Dutch government is planning an extra €6 billion in additional taxes and austerity measures for 2014, in order to meet the 3% threshold in the European Stability and Growth Pact, which is yet again advocated by European Budget Commissioner Olli Rehn. A ‘mission impossible’ as you might understand.

Of course, there still are a number of green shoots in the Dutch economy, just like an Italian bowl of tomato soup often contains leafs of basil.

However, just like with the Italian soup: when you look at it from a distance, the Dutch economy looks very red indeed!

The 21st Century’s great depression: Has ‘the great reset’ in The Netherlands finally begun? Pt I

I like to look at economic recessions as a large cleansing process. Such a process is akin to a forest fire, which burns away all fallen leaves, branches, dead wood and other waste products after a certain period of growth in the forest.

When the soil in a forest is filled with combustible waste and materials, a small spark can start such a forest fire. This fire burns up all waste and excess trees and cleans up the soil for a new period of growth and prosperity in the forest. This is a violent, but necessary process for the forest, in order to maintain its health, structure and diversity.

Mostly, the impact of such a forest fire on a macro-scale is limited and it causes only moderate damage, which can be fixed easily. Nevertheless, in many cases on a micro-scale(!) even the moderate damage caused by a limited forest fire is considered to be too much to bear for certain interested people; for instance people who own a house, a farm or a company in the forest.

What often happens in such cases is that the aereal fire brigade shows up with the extinguisher helicopters and airplanes. They extinguish the fire, before it has properly burnt out. Only small quantities of forest are hit by the fire, while the rest of the forest survives unharmed. This seems the perfect solution. No fire, no damage: everything is cool, right?!

Wrong…  

The waste and combustable materials in the forest don’t burn up in a small, low-impact forest fire, but pile up instead. As a consequence, the layer of these materials on the soil grows thicker and thicker and becomes more and more dangerous.

And then, at one doomed day, this - now massive - layer is set on fire: by a flash of lightning, an uncarefully dumped cigarette or a beer bottle glass. Or perhaps, on purpose by either a confused man or a bunch of brainless adolescents.

The fire that emerges now is feeding upon the massive layer of combustible materials, which lays on the soil. It becomes much bigger, hotter and more dangerous, as it has loads of fuel to build upon. Consequently, it gets out of control almost immediately, burning violently and unextinguishable. 

Where, during normal situations, large trees easily survive a small forest fire, now everything in the path of the fire is burnt away. Fire tornadoes, which appear during the extreme heat of a large forest fire, set everything ablaze: trees, bushes, grass, animals and people.

Eventually, the resulting damage of such a massive fire can be a multiple of what all earlier extinguished, small forest fires would have caused combinedly, when left untouched.

Sounds like the economy, right?

Since 1994, when the last small crisis emerged, the economy grew and grew and economic imbalances mounted. Trading and investing became 'too hot to ignore' and even the stately evening news in The Netherlands followed the international stock exchanges closely. 

In the 'real world' the Y2K-fear, the soaring growth of internet and e-services and the introduction of the Euro in Europe, spurred the demand for ICT-consultants to unprecedented levels. The same happened to people working in the financial and business services industries all over the world. 

If someone was not a complete fool, he was ready for a job in the ICT-services industry. And if he was even smart, he could work in the financial and business services industries.

The internet suddenly seemed the answer to all questions and the inflating dot.com bubble made everybody think that “the only way is up” for the Western economy. Recessions were a thing for misanthropes.

During 1999, after I started as a freshman ICT-consultant, I received - without asking - three  improved salary-offers... The next year ditto. On top of that, many amateur-investors made more money at the stock exchanges than during their normal daytime jobs.

Housing and commercial real estate prices in The Netherlands and anywhere else (Spain, The USA) skyrocketed. The building industry in Europe and the US had its finest hour, with so many projects in the pipeline that they really could ask whatever they wanted and still received it. People bought everything with borrowed money and the sky really seemed the limit. It was a forest fire waiting to happen…

And indeed in 2003, when the dotcom crisis broke out, it seemed that the forest was finally on fire. The mounted waste and combustable materials in the economy (excess salaries, soaring housing prices, excess commercial real estate and excess private and corporate debt) should have burned up and – after a few difficult years - the economy would have set again for a new period of prosperity.

Unfortunately, this small economic crisis was not to the liking of Alan Greenspan, the enigmaticly communicating chairman of the US Federal Reserve, and his peers in Europe, Latin-America and the Far East: they had fears for “the houses that would be hit by the forest fire” (i.e. the companies, banks, investors and people that would be hit by the emerging crisis).

Greenspan and his worldwide brigade of fire extinguishers put the small forest fire out. They did so by lowering the official interest rates to levels around 2% - 3% and by subsequently handing out almost free money to everybody and their sister. They reached their goal: the worldwide economy got a kickstart again and people with money everywhere embraced the hedonistic lifestyle, which belonged to the economic growth 'on steroids' that the Fed and its peers spurred in those days. 

People everywhere in the Western world bought bigger houses, bigger cars, bigger Swiss-made watches, more sophisticated telephones, more unnecessary household electronics and more expensive clothes and footwear. 

It was the time of conspicuous consumption: saving was seriously uncool, while collecting debt on everything was OK. Interest was historically low and risk seemed only a vague concept from a bleak past.

In a situation, where in the US even people without serious jobs and with no credit rating at all could buy a house with a skyhigh mortgage and a complimentary GM automobile on top of it, you know that “the layer of combustible material in the forest” has reached really dangerous levels. This was the case at the beginning of 2008.

The situation in Europe was slightly better in those days, but only just ‘slightly’. Also in Europe, there were bubbles of all kinds in Spain, Greece, Portugal, Ireland, Italy and also in formerly unsuspected countries, like The Netherlands.

And then the final sparks came, that set the whole forest ablaze: the subprime mortgage crisis in the USA and the subsequent bankruptcy of Lehman Brothers.

In the years since 2008, the forest fire burned the brightest and hottest in the USA: a banking crisis beyond imagination, a huge rise in unemployment, an unprecedented housing crisis and massive vacancy in the retail and commercial real estate industry were the symptoms of a forest fire, which burnt as hell.

However, these days the ‘new’ fire extinguisher Ben Bernanke and his henchmen seem to have the fire under control in the US, after five-odd years in the crisis. I do still have worries that not all combustible material has burnt away yet and that even now only the smallest spark is enough to set the forest on fire again. Nevertheless, the situation in the United States seems quite under control.

How different was the situation in The Netherlands: while the southern part of Europe had been severely struck by the emerging Euro-crisis and the soaring (youth) unemployment, the northern part of Europe and especially the powerhouses Germany and The Netherlands seemed to have everything under control.

Yes, the unemployment rose (somewhat) in The Netherlands, the housing prices went down (somewhat) and some major banks needed to be rescued with loads of tax-payers money, but that seemed to be everything, initially.

As the Dutch finance ministers all gloatingly told to the public, since 2009: "the Dutch state earned a massive profit on the loans and guarantees to the banks and insurance companies, which we rescued. It all have been very profitable investments".

It seemed that the North-European fire extinguishers had put the forest fire out in time, before it could cause real damage. And the South-Europeans?  They became the victims of the German / Dutch directives, rants and ‘Schadenfreude’: “Do as you are told, or else… you won’t receive a penny anymore!”.

The European Commission and the European Council, all extremely influenced by the Germans, who (of course) held all the money, put the South-Europeans on a disastrous road towards austerity without salvation. These countries (and especially the Greeks) were squeezed like lemons, due to the ruthless austerity measures that were put upon them. Their economies collapsed and their unemployment soared far within the double digits. 

Also the fact that financial aid for the peripheral countries came in very small tranches and under extremely strict conditions, led the countries further on the path of doom and gloom, instead that it offered them a solution.

[Ernst Labruyère: With the aforementioned statement, I don’t want to turn the peripheral countries into innocent victims. They made terrible mistakes during the last 10-15 years and they are mainly responsible themselves for the crisis in which they reside, currently. 

However, the solutions that the Euro-group and the troika chose, during the last 5 years, for especially Greece, Ireland and Spain deteriorated the situation in these countries distinctively, instead of improving it. For me, that is an undeniable fact].

In 2011, it seemed initially that the crisis was over in The Netherlands and Germany. Especially for The Netherlands this had been nothing less than a miracle: the country survived the worst crisis since the 1930’s with an unemployment increase of only 1.5%, where earlier crises with less economic impact showed unemployment increases of more than 4%. The housing prices had fallen only moderately and most parts of the economy (except for building and construction) did remarkably well. Germany performed even better.

It sounded almost too good to be true… And it was, in my humble opinion. In 2011, there was still something smelly in the Dutch economy… and it finally came out.

In one or two days, you can read the second part of this article…