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April 21, 2011

Spin Cycle

By Spear's

The only good news to emerge in Q1 2011 is that in March the US economy added a pretty anaemic 216,000 jobs. So now for the bad news.

THE ONLY GOOD news to emerge in Q1 2011 is that in March the US economy added a pretty anaemic 216,000 jobs. The bad news from the US is that property prices continued to fall by another 9 per cent over 2010, consumer demand still cannot get out of bed while inflation outstrips incomes, the Federal deficit keeps on rising and, worst of all, bankers’ bonuses are rising again too. (Lloyd Blankfein is at least sleeping easy.) And the news out of the UK is just as bad on most fronts: in Q2 the Coalition cuts will kick in, and even the extra bank holiday for the Royal Wedding causes a 0.25 per cent reduction in GDP.

In fact the bad news emerging from around  the world this year hasn’t paused for breath: the ongoing revolutions in MENA and consequent spike in energy prices were overshadowed by the Japanese earthquake and the ensuing tsunami and nuclear crisis at the Fukushima Daiichi plant, causing radiation leaks and production dependent on critical Japanese components to fall around the world, particularly in the automotive and electronics industries. GDP is under threat everywhere, apart from China, India and Germany, perversely benefiting from the falling euro. This lop-sided global recovery is set to stall further in Q2.

It was always going to do that even before the above negative factors worsened the position: the banking crisis is still with us, and now global inflation too. The centre of the banking crisis has moved from the Anglo-American collapse in 2008 and is now firmly entrenched in 2010/11 in the eurozone: while the new Irish finance minister announces that the banks need yet another €24 billion from the state to stave off collapse, it has not escaped notice that the underwriting by the state of its four banks now involves 300 per cent of its declining GDP — ten times its tax revenues.

This is completely unsustainable, and it’s the same story with Greece, and Portugal won’t be any different either. And all three said they had no problems paying their debts, they didn’t need an EU/IMF bail-out, which is exactly what Spain is saying now. Well, you recall that the Irish banks passed the EU stress-tests as recently as last July, so now the worry is that the eurozone banks are in far worse shape than they have been letting on: remember when in 1988 eight of the ten biggest global banks were Japanese? It has not been like that for a long time.

From the land of fables and fairytales, Heinrich Hassis, president of the German Savings Banks Association, said that the tougher stress tests about to be imposed this year would ‘create a danger that healthy institutions could be artificially made to appear sick’. (Sic.) And he was speaking on April Fools Day — say no more. It is easy to imagine all the jiggery-pokery going on now — ‘Pray and Delay’, ‘Pretend to Extend’, sovereign debt carried at its full repayment value in x years’ time; property loans gone sour, but as it’s bricks and mortar, no need to worry; and so on. After all, that’s what’s going on at RBS and Lloyds-HBUST, while the auditors go along with it all.

Nevertheless, the ECB has decided to take the inevitable step and raise interest rates now, which won’t help the PIGS at all, while the BoE clings to no-change from 0.5 per cent – now fully 5 per cent below the RPI – for the 25th consecutive month as the recovery is still ‘too fragile’. (What recovery, exactly?) Meanwhile the Fed has no plan other than to go on printing dollars to fund the Federal deficit up to the next election, and help to plump up the stock market in the process. If this is economics, then we are all a bunch of suckers who need an even break.

All of these factors — bankrupt banks, deteriorating public finances just about everywhere, global inflation — undermine fiat currencies. It will all add up (or rather won’t add up) to a sudden setback in the value of paper currencies, when reality finally dawns. It has happened before, and it will happen again.

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