IMF Growth Forecast: U.S. and Europe Will Ignore Warnings, Despite Slashed Estimates

By David Zeiler

In lowering its growth forecast for the United States and Europe, the International Monetary Fund (IMF) warned of "severe repercussions" unless drastic measures are taken soon.

But don't expect the warning to spawn any real action.

"The global economy has entered a dangerous new phase," Olivier Blanchard, the IMF's chief economist said in the report released yesterday (Tuesday). "The recovery has weakened considerably. Strong policies are needed to improve the outlook and reduce the risks."

The IMF slashed its 2011 growth forecast for the U.S. economy from the 2.5% estimate it offered in June all the way down to 1.5%. Next year won't be any better: The 2.7% 2012 projection the IMF offered in June was cut all the way to 1.8%.

"Bold political commitment to put in place a medium-term debt reduction plan is imperative to avoid a sudden collapse in market confidence that could seriously disrupt global stability," the IMF said.

But with governments in Europe moving slowly to contain the sovereign debt crisis afflicting the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and the United States suffering from political gridlock, the IMF's call to action will likely go unheeded.

In recent weeks, U.S. President Barack Obama has proposed a jobs plan, as well as a deficit reduction plan. But with congressional Republicans opposed to elements of those plans - primarily increases in spending and taxes - the swift policy action the IMF sees as critical will likely be stillborn .

In Europe, the IMF is calling for bold action to contain the debt crisis. It is particularly worried that a Greek default could cause many large banks - which own much of the Greek debt - to take large losses.

That U.S. banks are intertwined with European banks heightens the risk.

According to Money Morning C apital W ave S trategist Shah Gilani, "U.S. banks are widely believed to have $41 billion of direct exposure to Greece" and have loaned heavily to their European counterparts.

More sobering, Gilani says, is that "U.S. money-market funds have a hefty European exposure, too." He noted that 12% of the loans made by our biggest money-market funds were made to three big European banks - two of which, Societe Generale SA (PINK ADR: SCGLY) and Credit Agricole SA, were downgraded by Moody's Corp. (NYSE: MCO) just last week.

The third, BNP Paribas SA, remains under review. 

IMF Growth Forecast: Policymakers Are a "Step Behind"

Standard & Poor's Inc. (NYSE: MHP) cut Italy's credit rating on Monday, adding to the IMF's worries over the direction of the E urozone debt situation.

"There is a wide perception that policymakers are one step behind themarkets," Blanchard said at a news conference. "Europe must get its act together."

The 2011 IMF growth forecast for Europe was reduced from the 2% estimate released in June to 0.6%; for next year, the IMF cut its estimate from 1.7% to 1.1%.

With the advanced economies lagging, the global IMF growth forecast for 2011 also was trimmed - to 4.0% from an earlier 4.3% - and it cut estimates for 2012 to 4.0% from an earlier 4.5% .

About the only bright spot in the IMF report is the emerging markets, which are generally enjoying strong, if slowing, growth. Collectively, the IMF growth forecast for emerging markets is 6.4% for this year and 6.1% for 2012.

Standouts here include China (9.5% growth in 2011 and 9% in 2012), India (7.8% and 7.5%), and sub-Saharan Africa (5.2% and 5.8%).

"After strong growth in recent years and on the horizon, most [emerging and developing economies] are in the enviable position of being able to invest in growth and employment and to brace against future global economic volatility," the IMF report said.

Unfortunately, if the advanced economies take a tumble, they'll drag down the emerging economies with them, the IMF said.

"Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing," the IMF said.

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QE Can’t Save the Day… We’ve Been Doing a Form of It For Over a Decade

by Graham Summers

While most commentators proclaim that QE is a completely new phenomenon, we have in fact seen a version of it in the form of the Fed’s and Asia’s (especially China’s) purchases of US Treasuries/ currency pegs over the last decade or so.

Indeed, today, the Fed, China, and Japan collectively hold 61% of the $10 trillion of US debt held by “the public.” When you add in the additional $4.6 trillion in US debt held by “intragovernmental holdings” (basically the Federal Government buying Treasuries by raiding Social Security and other pension funds) you find that Asia and the Feds have monetized $10.7 trillion of the US’s total $14.6 debt (roughly 73%) over the last 20 years.

In this context, unveiling even more QE (the Fed buying US debt) is virtually pointless. Indeed, the Fed would have to unveil a QE plan of $2 TRILLION just to make its US debt ownership on par with the Federal Government’s “intragovernmental holdings.”

To put a $2 trillion QE program into perspective, that would be on par with the Fed unveiling a QE program equal to QE 1, 2 and some of QE lite combined in one single program.

Now, if QE 2 which was only $600 billion, blew the price of food and energy through the roof, how would a QE program of $2 trillion impact these items? Do you really think the Fed could unleash a QE program of that size without inciting full-scale unrest in the US, not to mention destroying the US Dollar.

And with the Fed already as unpopular as it is, Obama’s polls falling to new lows on a weekly basis, and Bernanke well aware of the potential legal issues coming his way, the odds of the Fed doing this in two weeks’ time are next to none.

Indeed, the Fed’s balance sheet is already close to $3 trillion in size. How would commodities and the US Dollar respond to a Fed balance sheet of over $5 trillion? The Fed has already proved it has no means of draining the liquidity its put into the system in the last two years. What impact would an additional $2 trillion have?

The short answer is that QE 3 of that size would kill the US Dollar, destroy the US economy, and result in Bernanke being forced to resign at the least and possibly the Fed being dissolved.

Do you think the Fed would do this? These guys are morons, but they’re not so stupid as to take note of how the Greeks responded to financial ruin.

Another consideration is that each new Dollar of QE has created less “bang” for the marketplace. As I noted in previous articles, QE 2 proved that each new Fed stimulus program is less effective than the first. At that time I wrote:

Consider that QE 1 provided $1.25 trillion in liquidity to the markets. From the date of its inception until its end, the S&P 500 roughly 540 points. Put another way, each $10 billion was worth 4.3 points on the S&P 500.

In comparison, QE lite and QE 2 put roughly $900 billion into the market (roughly 75% of QE 1) creating a 251-point rally in the S&P 500. In this case, every $10 billion in additional capital was worth 2.7 points on the S&P 500.

So in financial terms, QE 3 is not likely to have a large impact on the market. The reason is that the entire US GDP miracle has been induced by some form of QE whether it be the Fed, China or Japan buying US debt or the US raiding pension funds to buy Treasuries over the last 20 years.

Combine these facts with the inflationary pressures created by QE 2 as well as the current political climate which is increasingly anti-Fed, and it’s clear the Fed will not be able to unveil QE 3 without some kind of catastrophe hitting first. Put another way, the Fed will be acting purely reactively, not proactively going forward.

This sets the stage for a MAJOR upset to the downside in the near future. Indeed, I fully believe that we may be on the verge of a market Crash. Behind the scenes, the market is on DEFCON Red Alert. Ignore what the mainstream media and White House are saying, we are in BIG TROUBLE.

So if you’ve not already take steps to prepare for what’s coming, you need to do so NOW while the markets are still holding up.

Because once the selling pressure comes back into the markets… it’s going to be far FAR too late.

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Fed Preview: Today's FOMC Meeting Will Prove That Team Bernanke is Out of Ideas

By Kerri Shannon

If you're handicapping the U.S. Federal Reserve's two-day Federal Open Market Committee (FOMC) meeting that concludes today (Wednesday), you can make the following two predictions - and you'll almost certainly be right:

• U.S. Federal Reserve Chairman Ben S. Bernanke will announce some form of economic stimulus.
• But the short-term benefits will be small, and any long-term benefits won't be enough to help out-of-work Americans or jump-start the wheezing U.S. economy.

"I do think the Fed will intervene," Money Morning Chief Investment Strategist Keith Fitz-Gerald said in an interview. "But I don't believe for a second that the central bank's intervention will help the U.S. economy."

Troubling Trends

If anything, the nation's economy looks worse today than it did on Aug. 9, which is when central-bank policymakers last met. The "official" unemployment rate remains at an alarming 9.1% - with no jobs added in August - and true joblessness may range from 17% to 23%. Housing starts declined last month by the greatest amount since April. And the International Monetary Fund (IMF) just downgraded its U.S. growth forecast to 1.5% from 2.5% [To see related story in today's issue, please click here].

The spreading European sovereign debt crisis continues to whipsaw stocks, oil prices and gold. And several dramatic single-day plunges - in stocks and in gold - spooked investors for days after the event.

Bernanke feels pressure to act, but the odds that Federal Reserve policy can make a meaningful splash are low indeed, Money Morning's Fitz-Gerald says.

What to Expect From Today's FOMC Meeting

Since the Fed's actions have so far done little to ignite economic growth, investor expectations were muted ahead of today's FOMC meeting conclusion.

"It looks like the market is baking in an announcement of some kind of quantitative-easing strategy," Deirdre Dennehy, portfolio manager at Rockland Trust, said in an interview. "[But] for them to announce a QE3, I'm not sure how impactful that's going to be. The more times they do that, the less the effect in the market."

Analysts expect the Fed will attack longer-term rates by adjusting its $1.7 trillion portfolio of U.S. Treasury securities.

At its last meeting, the Fed announced it would keep short-term rates near zero until 2013. Since the central bank has no more room to reduce rates, this time it'll make a move to encourage borrowing and spending.

"My guess is it's going to look something like "Operation Twist" from the 1960s," Fitz-Gerald said in a Bloomberg Radio interview. "They're going to probably print more money, buy more Treasuries. They're looking to manipulate, or twist, the yield curve by flattening it out."

The government first used this "Operation Twist" tactic in 1961. The expectation is the Fed will sell debt maturing in three years or less and buy mostly seven to 10-year notes to flatten out the yield curve so that long-term borrowing gets cheaper. The goal is to get corporations to spend their cash piles and push investors out of safe-haven Treasuries and into stocks.

"They're literally trying to force scared consumers and scared investors into the market," said Fitz-Gerald. "They're trying at the same time to free up that logjam of funds that corporations are, in fact, sitting on."

Markets have already anticipated a move like "Operation Twist," and yields on 10-year Treasury notes have slipped to 1.94 % from more than 3% in July. That's the lowest yield on the Treasury notes in more than 50 years. But the Fed move could still lower the 10-year rate by another quarter-point at today's FOMC meeting

If billions of new dollars are actually pushed into the financial markets by a central bank action, the stock-and-bond markets will see some gains. But any such gains will be short-term in nature - just as they were after earlier quantitative -easing measures, Fitz-Gerald said.

"Look at what happened when Bernanke waded into the market with QE1 [and] QE2 ... the markets tended to like that," Fitz-Gerald said. "But longer term, the economic system is very different from the market system, and that's the underlying issue here."

C entral-bank policymakers do have a couple of other policy options. According to minutes from its last meeting, the Fed could opt to trim the 0.25% rate it pays banks that store excess reserves at the central bank.

It could also institute a third round of bond buying, or QE3. But policymakers are likely to avoid this maneuver, due to the heavy criticism that followed QE2.

Anything the Fed does announce is expected to be a small initiative, with more aggressive action held until the next meeting in November.

"These are tinkering measures, not the financial bazooka, so to speak," Carl Riccadonna, senior U.S. economist for Deutsche Bank AG (NYSE: DB), told Reuters. "If we get to a period where the employment numbers turn negative - then I think there will be much more agreement on the Open Market Committee that they will have to do something bolder. We're certainly not there yet."

Regardless of what weapon the Fed chooses, investors are clearly skeptical that Team Bernanke can draw a winner from its arsenal at today's FOMC meeting.

"With banks still repairing their capital positions and interest rate levels hardly an impediment to growth, the Fed has run out of effective tools to do anything more than marginally affect markets, and whatever it does from here is basically politically driven and will have little economic impact," Josh Shapiro, chief U.S. economist at MFR Inc., wrote to clients.

The Fed is scheduled to announce any actions recommended at today's FOMC meeting at 2:15 p.m. EDT.

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A FISCAL UNION FOR THE EURO – SOME LESSONS FROM HISTORY

By Michael Bordo, Lars Jonung, and Agnieszka Markiewicz

The single European currency is the first of its kind – a union where monetary policy is decided centrally and fiscal policy decided nationally – something that many argue is the root cause of its troubles. This column looks to history to find examples of federal states with a common currency but without the frailties currently being exposed in the Eurozone. The main lesson: No bailouts.

The current sovereign debt crisis in Europe, now threatening the existence of the euro, has revealed major faults in the design of the fiscal framework of the Eurozone. It has inspired a heated debate reflected in a steady flow of proposals concerning the proper rules and institutions for fiscal policymaking in the EU. The debate shows no sign of an emerging consensus (see for instance Gual 2011 and Wyplosz 2011 on this site).

One reason for this lack of unanimity is that the Eurozone represents a new type of monetary union. It is the first monetary union where monetary policy is decided at the central (European) level while fiscal policy is carried out at the sub-central (member state) level. Thus, the economics profession lacks historical cases to use as guidance for theoretical, empirical, and policy-oriented work. The debate also reflects different country perspectives. Economists and policymakers in EU member states like Germany with strong fiscal positions and current-account surpluses tend to have other views than economists and policymakers in debtor countries like Greece and Italy with weak fiscal records.

In a recent working paper (Bordo et al 2011), we add to the current debate by turning to the history of fiscal federalism for an answer to the question: What are the lessons from the past for the fiscal arrangements in the Eurozone? In short, we ask, which fiscal arrangements in the federal states that we study would help to avoid the centripetal forces that threaten the stability of the Eurozone? This is done by exploring the record of five federal states: Argentina, Brazil, Canada, Germany, and the US.

The five federal states studied by us are monetary unions as well as fiscal unions based on fiscal federalism. They are monetary unions in the sense that they have all one common currency and one central bank managing monetary policy for the union. They are fiscal unions in the sense that one central authority is in charge of union-wide fiscal policy. However, these fiscal unions are organised as federations, where sub-central (regional or state) political entities enjoy significant independence to decide legislation, including taxes and government expenditures, at a level below the national (central) one. Within the fiscal union, there is a common market characterised by free trade and mobility of labour and capital.

The governance structure of the Eurozone has important similarities with that of a federal state. It is set up as a monetary union with the ECB as the central bank of the Eurozone. However, the central budget, the EU budget, is much smaller than the size of the budget of the central government of a typical federal country reflecting the fact that the political power of the centre (‘Brussels’ for short) is also much weaker in the Eurozone.

Lessons from the history of fiscal federalism

Our survey of the evolution of the five federal states in our sample leads to the following conclusions:

First, all the fiscal unions have evolved in close interaction with the political unions forming the ultimate basis for their fiscal cooperation. Federalism is not a static pattern, characterised by a precisely defined division of powers between governmental levels. It is a continuous process by which a number of separate political communities enter into arrangements for working out solutions and making joint decisions on common problems. Thus, each federation is an evolving entity shaped by economic and political events.

In particular, fiscal policy arrangements are driven by exceptional events, often by deep economic crises. The most prominent example is the Great Depression of the 1930s which affected in a fundamental way the institutions of the five federal states. During and after the Great Depression, the American, Canadian, Argentine, and Brazilian federations underwent a process of centralisation. This centralisation made it easier for the federal governments to either introduce (as in the Canadian case) or extend (as in the US example) measures aiming at equalisation of incomes across regions. Such measures were part of the stabilisation process, since the regions which were more harmed by the recession received larger financial transfers. Thus in case of a major negative shock the federal state learned to implement measures to improve the conditions of the most harmed regions.

History also suggests that the most appropriate way to finance interregional transfers in distressed times is by a national (union-wide) bond market. After the American War of Independence, Alexander Hamilton, the first Secretary of the Treasury, introduced a stabilisation plan to get the new Republic on its feet. The war had been largely financed by the issue of paper money and the resulting hyperinflation plus the default by the states on their debt left the new nation in a fiscal shambles. Hamilton consolidated the state and federal debt in a new national bond which was to be serviced by customs duties and excise taxes. The new bond issue was a success which allowed for the financing of future wars and secured tax revenue at the national level.
By contrast, Argentina when it gained its independence two decades later emulated Hamilton’s plan. However, shortly after creating its fiscal union, Argentina monetised its debt. It was not able to secure sufficient revenue sources to service its debt.

We also find a clear difference between well-functioning and poorly functioning federal states concerning inflation and debt accumulation. The US, Canada, and Germany are federal states that have maintained a relatively strict fiscal discipline among sub-national units during recent decades. They have fared better than Argentina and Brazil in our sample. As a rule, the former three countries have displayed lower rates of inflation; less inflation variability and less debt accumulation than the latter two.

Our account of the history of fiscal federalism demonstrates that fiscal discipline has been obtained through several techniques: explicit or implicit no-bailout clauses, constitutional restrictions, and discipline exercised by financial markets for government debt. Once overall budgetary discipline prevails through a no-bailout rule, considerable revenue and expenditure independence of sub-national governments can be maintained. This independence for regional fiscal units is thus due to a system of rules that ‘anchor’ their fiscal behaviour at a sustainable path.

The present system of budgetary discipline in successful fiscal federations is the result of a ‘learning-by-doing’ process. In the presence of moral hazard, the federal government must give a signal of commitment to the sub-national authorities. Otherwise, the latter will not learn. For example, the US government as early as 1841 gave the message that it would not provide bailouts to states in financial trouble, gaining credibility for a no-bailout policy. Today, virtually all of the US states have their own balanced budget rules and most importantly they respect them. Today, it is the federal government that displays high deficits.

Two out of the five federations were not able to learn from their negative fiscal experiences in the past. The Argentine and Brazilian federations during the 1980s and 1990s experienced several financial crises, which occurred because they followed an undisciplined fiscal policy. Moreover, for them, the lesson has not yet been learnt. In each of these crises, the central government has bailed-out the sub-national fiscal authorities. Indeed, there is still no credible mechanism in these federations to impose fiscal disciple.

Lessons for the Eurozone

The history of successful fiscal federalism points to the following policy lessons of relevance for the Eurozone today.

The first lesson from history suggests that a no-bailout clause helps to avoid pressures threatening the stability of the monetary union. This has worked in combination with a system of close monitoring of the fiscal policy and debt accumulation of the members of the monetary union, carried out by an institutionalised system as well as by financial markets. Without a strict and credible no-bailout clause, the financial market mechanism is likely to fail as an efficient disciplining device on fiscal policy.

A main problem of fiscal policymaking in the Eurozone, undermining budgetary discipline and the workings of the Stability and Growth Pact, is the lack of efficient fiscal governance in a number of member countries. The solution is to improve at the level of the member states weak domestic fiscal institutions through reforms, increasing their independence, accountability and transparency – much in the spirit behind central bank reforms in the past decades.

The second lesson for the Eurozone suggests that regional fiscal units (member states) can have considerable revenue and expenditure independence within a system of no-bailout by the centre (Brussels and the ECB).

The third lesson indicates that the creation of a union-wide bond market with a common bond may prove to be a successful way to finance temporary increases in public expenditure to prevent the malaise experienced today in Europe. Federal borrowing avoids the problems of liquidity and credibility faced by member states suffering from lack of fiscal discipline, thus giving rise to overall lower interest rates than otherwise.

A fourth lesson from history is that, in the face of a global crisis like the Great Depression, the fiscal capacity of the central government is strengthened and the system of transfers and equalisation payments across the members of the fiscal union is increased. This pattern suggests that the recent global crisis, which is the most severe one since the 1930s, may contribute to an increase in the central fiscal power of the EU, paving the way for larger transfers to the member states hardest hit by the crisis.

Indeed, the policy response of the EU since the start of the recent crisis strongly suggests that such a movement has begun concerning recent proposals for strengthening of EU surveillance and control of fiscal policies, the creation of a Eurozone Financial Stability Facility (EFSF) and the design of EU financial regulations.

The fifth lesson from the experience of successful fiscal unions is the importance of learning from – and adapting to – changing economic and political circumstances. Such a process has already started in the EU as witnessed by the reforms and changes in the institutional framework both at the EU-level and within several member states. The future will reveal if these changes will prove to be sufficient to make the Eurozone a sustainable monetary union.

Conclusion

The history of fiscal federations provides us with a number of conditions necessary for a fiscal union to function smoothly and successfully and thus also the monetary union on which the fiscal union is based. The first and probably the most important condition is a credible commitment to a no-bailout rule for the members of the fiscal union. The second one is a degree of revenue and expenditure independence of the members of the fiscal union reflecting their political preferences. The third condition is a well-developed transfer mechanism to be used in episodes of distress. This transfer mechanism can be facilitated by the establishment of a common bond. The fourth condition is a capacity to learn from past mistakes and adapt to new economic and political circumstances.

The Eurozone was created without an effective fiscal union. The institutions that were established to serve as the foundation for the fiscal union (the Maastricht Treaty and the Stability and Growth Pact) – to discipline domestic fiscal policies – did not function as planned as revealed by the crises and recession from 2007-2009 and onwards. The lessons from the historical experience of the five federal states surveyed by us could be helpful for the Eurozone to avoid disintegration.

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The Importance of Defense

by Guy Lerner

The news is frightful. The economy is in the doldrums. Europe is crumbling. The markets are up 4oo one day and down 400 the next. Thoughts of 2008, when venerable institutions, Lehman Brothers and Bear Sterns, — remember them? — fell like dominoes play in the minds of investors. There are never any certainties in life or in the markets for that matter, but seriously, what is an investor to do?

Three words….Defense! Defense! Defense!

Defense is not only important for success on the court or ball field but also on the playing field of investing as well. How many investors wish they could do 2008 all over again? Of course, 2008 marked the second bear market in 8 years, and many investors suffered losses to their portfolios exceeding 40%.

Why is defense so important when investing? The math is simple, and this is all you need to know. Say your portfolio incurs a 10% loss. To make back your losses, you need to gain 11%. Very doable and very reasonable. Now your portfolio incurs a 20% loss. To get your portfolio back to even, you need to score a 25% gain. However, there is one problem. Gains like that don’t come along too often. Since 1973, the SP500 has gained greater than 25% (in any one calendar year) only 3 times. Get into a 40% loss like most investors did in 2008, and you will need a 66% gain just to break even!! Needless to say if your portfolio suffers extreme losses, it will be a long time before you are made whole again.

Fortunately, when it comes to investing, playing defense is relatively easy. Unfortunately for investors, they usually don’t think of defense until their portfolios have suffered those crushing losses. So what can you do to play better investing defense?

Here are 4 steps you can implement right away. The first and probably best thing you can do for your financial health is to have an investing plan. Our lives are busy and complicated enough, so having a professional financial advisor craft and execute a plan for you is essential. It is worth the money. Successful endeavors usually require discipline and skill, and investing is no different. The second thing you can do is to be diversified in your investments. Don’t put all your eggs in one basket. The third step is to be data centric in your approach. Avoid the water cooler tips and do your homework from the many credible resources on the internet. Fourth, always question the prevailing dogma and never believe that “this time is different” because it usually isn’t.

For many investors, playing defense is akin to sacrificing gains. Academic research and history tells us that you can construct winning strategies that play both offense and defense. You don’t have to sacrifice rewards to control your risk. From this vantage point, successful investing starts with avoiding a hole that you cannot get out of.

So put your game face on. Knuckle down. And play some investing Defense!

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The S&P Downgrade of Italy and the Real Elephant in the Piazza

By Doug Short

Standard & Poor's downgrade yesterday of Italy's long- and short-term sovereign credit ratings came as no surprise to anyone who follows the Italian stock market.

Italy's benchmark equity index, the FTSE MIB (Milano Italia Borsa) dropped 3.17% yesterday. Today recovered some of that loss with a gain of 1.91% in the wake of the downgrade. However, a longer-term look at the MIB illustrates its exceptionally poor performance since its peak in May 2007. At its March 2009 low, the index had declined 71.6% from its peak. At today's close the index is still down 67.6% from its all-time high and 41.2% off its interim high set less than eight months after the 2009 low.

As for the S&P downgrade, the company uses five main factors in determining its sovereign ratings:

1. Political: The ability of government and policy makers to deliver sustainable public finances, economic growth, and responding to shocks.
   
2. Economic: A combination of income levels, growth prospects, and economic diversity and volatility.
   
3. External: The ability to generate receipts from abroad to meet its obligations to nonresidents.
   
4. Fiscal: The sustainability of a sovereign's deficits and debt burden.
   
5. Monetary: The ability to support sustainable economic growth, deal with shocks, and thus support sovereign creditworthiness.

In its published explanation, dated the day of the downgrade, S&P identified the political and fiscal (specifically fiscal debt) factors as the primary drivers for their decision. The scores relating to economic, external, and monetary factors did not contribute to the downgrade.

Standard & Poor's ratings method focuses on dynamics that can be altered by significant changes in business and political cycles. In the case of Italy, however, there is a demographic elephant in the room that will probably become the major determinant in the long-term ability of the country to improve its sovereign stature.

The chart below is based on international data from the U.S. Census Bureau. It differs from the standard pyramids on the Bureau's website in that I've constructed it to show the percent of population by age group and gender.

Italy has an astonishing demographic bulge in the 35-49 age brackets. This is an age group that is commonly associated with the early peak earning years in developed economies. If Italy's sovereign responsibilities can be hitched to this demographic elephant and the political and economic leadership can drive it in the correct direction, Italy can eventually get its economic act together.

If, on the other hand, the Italian government and other policy makers are unable to harness this population bulge in its prime, it will eventually become an economic drag of, well, elephantine proportions — one that will burden the country for generations to come.

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