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  1. Wealth
March 9, 2009

How long, O Lord, how long?

By Spear's

Nowhere is recovery in view, but a slump is threatening every economy, and global depression is in prospect.

‘How long will this recession last?’ is the question on everyone’s lips. As with any question, however, it’s the phrasing of the exact question which will throw out the most useful answer; so, how about this: ‘How long will this global downturn last and what and how long will its consequences be?’

The OECD has now opined that the BRIC economies have joined the global recession, with Brazil and Russia particularly badly affected, but it’s perhaps the downturns in India and China which are more important for the global economy, given their sheer size.

The contraction is particularly affecting the exporting nations: Germany’s GDP declined 8.2% in Q4 2008, Japan’s exports were down year-on-year 58% in January 2009, and China’s exports have collapsed by over 30% and are still falling.

Nowhere is recovery in view, but a slump is threatening every economy, and global depression, defined here as GDP down by 10% from peak, is everywhere in prospect. The UK, for example, is already forecast by the Item Club to have 6% lower GDP in 2009, which when added to last year’s contraction, puts the economy in depression, and no serious commentator sees recovery in 2010.

At the root of this beckoning global depression lies the Credit Crisis, or the insolvency of the banking system, which now embraces the world. The Anglo-sphere and Eurozone governments have been bailing out banks, insurance companies and auto manufacturers with unbelievable billions, but a sad fact stares us in the face: all that money went straight down the tube of all losses.

The new money became dead money as soon as it went into the black holes of New York, London and Motown. The trouble is that the debt-deflation of the underlying assets continues apace, and the latest $30 billion into AIG and the proposed £12.5 billion Right’s Issue into HSBC is already Dodo-money.

The banking system may have been saved, but liquidity is worse than ever, not least because the banks must de-leverage and absorb more losses at the same time.

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The credit that global trading requires has dried up, as no bank can trust any other bank, so the Baltic Exchange is showing shipping at or near zero cost. It’s the same with the insurance companies, which are threatening to become the next disaster zone.

So manufacturing is in sharp decline and unemployment is rising everywhere, and the inevitable protests have appeared in the most beleaguered countries: Athens, Dublin, Kiev, Reykavik, Marseilles and Zaragoza, to name but a few, and civil strife will soon become a growth industry. No wonder stock markets are everywhere in retreat, with the Dow down 53% from its 2007 peak..

Western governments, led by the UK and US, are now resorting to Asset Protection Schemes to underwrite bank toxic assets and to Quantitative Easing to increase the broad money supply, or M4.

Whether this will have sufficient or any affect is not yet known, so it’s a desperate shot in the dark that will definitely have one damaging affect: when recovery comes, inflation will rise, then interest rates, so any future recovery is already being hobbled. The two essentials to put in place to deal with this recession, namely lower government spending and lower taxation, are not even on the agenda, as government borrowing threatens to crowd out the private sector from that scant but vital resource – credit.

The only possible answer to the question is this: the end of the recession or depression is one day nearer with every day that passes, but only to be followed by super-stagflation that could easily last for up to ten years on present policies, which would see out the Democrat and any incoming Conservative governments if they fail to implement the spending and taxation cuts, on which revival really does depend.

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