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  1. Wealth
October 11, 2010


By Spear's

It’s extraordinary that this facile idea has gained such currency, as though the slumpflation of the 1970s never existed

Last week I wrote that the demise of the utterly bust Anglo Irish Bank threatened to bring Ireland’s finances down with it and heralded the onset of Banking Crisis 2. The next day the Irish Ministry of Finance attempted to renege on the bank’s bonds, until it was threatened with legal action around the world.

Anyone can work out that a bust bank is as useless as a pub with no beer, apart from the ones running their Ministry of Finance, it seems: when will they realise that there’s no way out of the €uro-mess they have created, other than to restore their own currency, the one that rhymes with Bank Manager, so that they can engage in the latest game in town, namely competitive currency devaluations.

Then the authoritative voice of the IMF gives the real picture: the US and EU banks need $4.0/£2.5 trillion of refinancing over the next 24 months. Now, that’s a lot of Guinness. New bank equity is sorely needed by the banks in real trouble, namely the Spanish Cajas, the German Landebanken and the American banks, which need another $130 billion if real estate prices keep on falling, and they’re doing just that.

It doesn’t help that the US and EU banks have still not written off $550.0 billion of their bad debts, which totalled a staggering $2.2 trillion. The British banks are said to be in better shape: they only need to refinance over £750.0 billion by end-2012, £285.0 billion of which is emergency funding support, some better indeed.

And there’s another nasty whiff in the air too: beggar-my-neighbour protectionism. It takes the form of currency devaluations, and they’re all at it, all that is other than those in the supposed One-Size-fits-All €uro straitjacket, like busted Ireland and the PIGS, although Sarkozy is dreaming up French sleight of hand to lower the value of the €uro, but the PIGS are ahead of him and are very efficient at destroying value. (Incidentally, Borat – yes him! – is now marketing a One-Size-Fits-All Mankini, a bikini for men that really grabs you where it hurts if you’re the wrong size!)

The chief offender in the currency devaluation stakes is of course China, but its tie to the Dollar is made worse by the fact that the Americans, like the British, are levering their currency down too. Britain’s devaluation has been 25% since Lehman popped out of the toaster. China’s Premier Wen Jiabao, meanwhile, argue that their risk of a higher Yuan is social unrest, because if all the peasants fleeing the droughts in the north cannot find work on their east coast, then riots will ensue. Meanwhile 26.4 million Americans, or 17.1% of the workforce, are not in fulltime employment.

It’s game-on as far as the Chinese are concerned, your riots or ours. We only need trade wars to break out and we’ll all be back to Fordney-McCumber and Smoot-Hawley Tariffs, to around 1933 if my memory serves me right. It’s an old formula: busted banks + austerity programmes + declining GDPs + protectionist tariffs = unemployment + civil unrest + strikes = more tariffs + debt-deflation = more currency devaluations + more QE = inflation/slumpflation = Depression + more unemployment = War. Got it? It’s enough to drive sober men to drink, and to reach for their tin-hats!

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The new thinking on the 1930s’ Great Depression, lead by Milton Friedman and adopted by Messers Bernanke and King, was that the 1930s’ Depression could have been averted if only the authorities had created more fiat currency in circulation. Or in other words, just print more money.

It’s extraordinary that this facile idea has gained such currency, as though the slumpflation of the 1970s never existed. We all know what happened then; the banks went mad on property lending – as if that should surprise us! – and governments let the inflation genie out of the bottle and the result was the lost decade of the 1970s.

And now, it’s fast becoming official policy! The policy of desperation, if you ask me, while no one contemplates the real causes of the boom-and-bust cycle of recurring economic slumps. So, Helicopter Ben, may the fog of this thinking mercifully ground you and save us all from the merry-go-round ending in the next inevitable bust. Amen.

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