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  1. Wealth
June 29, 2010

Heading for a Fall

By Spear's

Over a year ago Spear’s predicted a double-dip recession.

Over a year ago Spear’s predicted a double-dip recession, for the simple reason that total debt, that is public debt and private debt, was so high in relation to GDP in Japan, the EU and US that it was inconceivable that repayment could ever be made, and that as a result a classic debt-deflation trap was more likely than not.

That inescapable mathematics, and the fact that the average length of a banking crisis is 4.2 years, lay behind our prediction, while the central bankers hosed down the system with Quantitative Easing and governments threw Keynesian dollars at their economies to save their GDPs, in a vain attempt to stave off the inevitable; they hoped the BRIC consumers would haul the world out of recession, but the maths on that idea never did begin to stack up, as their GDP per capita remains minimal.

So where are we now? The evidence all points to a double-dip in Qs 3-4,  2010 – Qs 1-2, 2011. And, surprisingly, the great hope of China is now the economy to watch: the mandarins have been covering up the extent of their local government debt, where provincial budgets are a state secret, or were until the National Audit Office revealed that some local government debts were over 100% of their disposable revenues, and the highest was at 365%!

The “audited” accounts of 18 out of the 22 provinces, and 16 cities and 36 counties, had total debt of £280 billion in 2009, equivalent to 71% of China’s GDP. Some observers, however, say the true figure is 2 to 4 times greater…

But it’s in Japan, the EU and the US where the real debt problems linger and fester. House sales in the US, for example, were down 33% in May, as the Homebuyer Tax Credit expired; unemployment is stuck at 9.7%; manufacturing capacity is utilized for only 71.9%; and over half the states are grappling with Chinese-style budget deficits as well; while inflation is at a record low of 0.6%.

Tellingly, M3, or broad money that includes bank loans, is down 7.6% in the last three months, which is a strong deflationary indicator, while the positive effect of 2009’s fiscal stimuli and QE begin to wear off. The Euro-zone, meanwhile, threatens to be the ground zero of Banking Crisis 2, while in the UK the Coalition government has sensibly begun to wield the axe at the bloated public sector and has made no bones about the real austerity that lies ahead.

So what does Bernanke, the anointed guru of Friedmanite depression economics, do next? Resort to more QE? His first dose of this volatile substance was used to prop up the banks by buying bonds from them, but this doubled the Fed’s balance sheet to $2.4 trillion. Is he now going to swell the balance sheet even more, towards $5.0 trillion, as he favours the non-bank private sector with his largesse?

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The risk is unknown and could be enormous, and possibly disastrous, as monetary-induced hyperinflation could corrupt and even destroy the value of the dollar itself, taking other fiat currencies with it. As we predicted over a year ago, the world’s indebtedness is too great to avoid the double-dip, or worse. Hang on to hats, and your gold.

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