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  1. Wealth
June 6, 2011

A Sweaty Summer

By Spear's

Readers of this column have had plenty of warning of the coming double-dip and have surely sold in May and gone away

Readers of this column have had plenty of warning of the coming double-dip and have surely sold in May and gone away to sip their Pina-Coladas on the beach. Those that have clung on in there are in for a bumpy, hot, sticky, sweaty summer, what one might dub a ‘Colonel Gaddafi Summer Experience’.

The trouble is America and the Dollar, and the eurozone and the PIGS, and Sterling and the UK, and the Yen and Japan, and the droughts in China and revolutions in MENA. And above all the stratospheric levels of debt just about everywhere.

America is still by far the biggest and most important economy on which the world economy depends: its housing market is stuck in the doldrums – 10 million homes vacant and 2.3 million in foreclosure – but it’s the unemployment, stuck on 9.1%, which is affecting consumer consumption, as industrial order books and services fall at the same time, a stifling combination that is mirrored in the UK.

Congress looks like being log-jammed until next year’s elections, while in the UK the Osborne cuts are now biting hard, but he is caught in a trap not of his own making: he can only fund the alarming deficit by maintaining the confidence of the bond markets, which means no reversal or slowing of the cuts, or interest rates will have to rise and make the whole fragile edifice crash around his, and our, ears.

The PIGS are discovering all this for themselves: far too much debt, then more debt coupled with austerity programmes, leading to declines in GDP, so that those debts then represent a higher ratio of debt-to-GDP, so interest rates have to rise.

Any number of negative scenarios could come to pass in the hot and sweaty months ahead: the Arab Spring is far from over; Spain increasingly looks like the next EU shoe to fall; the droughts in China will cause food and energy prices to rise; inflation will follow, led by commodities; the US and UK are heading into double-dip territory; and civil disobedience will spread throughout the soft underbelly of Europe and in the Middle East, with some governments set to fall. The fact that Gaddafi’s days appear numbered might be the only good bit of news around, but that will not make the slightest difference to the world economy.

The trouble is that the western mind-set is all predicated on growth being the answer, as it has been the way out of every previous post-war recession, but the fact is that before the Credit Crunch the advanced economies accounted for 80% of global growth, but now the emerging economies account for 80% of the growth since 2008 and the advanced economies just 20%, which is not enough to handle their swollen deficits and debts.

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And the idea that Bernanke’s printing press is going to reignite growth is a forlorn expectation: the only thing his crazy behaviour will ignite is inflation and the continuing fall of the dollar: take note that Mexico bought 100 tonnes of gold the other day, dumping dollars. If you’re not yet on the beach, get there soon!

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