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November 4, 2011

Western Leaders Still Fighting the Last Economic War

By Spear's

Future Tense Politicians and bankers are inefficiently using old tools with old attitudes, when what they need is to face the future and acknowledge its new challenges. With the countdown to global financial Armageddon started, the only issue is who will get there first, Europe or America?

Future Tense

AN EPOCH IS ending and a new era is coming over the horizon, but the world’s leaders seem to be oblivious to both. In America, the election of the first black president rekindled Martin Luther King’s dream; Barack Obama’s dream of universal healthcare followed hard upon George W Bush’s dream of home-ownership for all, but neither is ultimately affordable.

In Europe, the political class wanted to replicate the American dream with a United Europe, so that there would be no more wars, and in their dreams they thought a currency union would achieve this noble aim, but the reality is the eurozone is being torn apart by its creation, the euro, the one-size-fits-all solution that no longer fits anyone.

It is said that generals are always fighting the last war, even as they create the next one. Never has this been truer than today: our politicians and central bankers are inefficiently and insignificantly using old tools with old attitudes, when what they need is to face the future and acknowledge its new challenges. The world economy teeters on the abyss of a double-dip recession and Banking Crisis II, and possibly worse.

Having let the economy roar ahead on the back of ultra-low interest rates and endless credit ever since 9/11, they created a situation that crashed in on itself and which is so indebted wherever you look — federal, state and national debts at all-time records, housing and consumer debt too, and banking indebtedness inhibiting growth — that it compounds the dynamics of the debt crisis still further. And their sole response to the crisis is…? Why, just incur yet more debt, print more money and somehow get back to growth. The UK’s October QE2 is one example, the raising of the American debt ceiling by $2.4 trillion and Obama’s Keynesian $448 billion on job creation others. It hasn’t worked and it won’t work in the long term.

Meanwhile, even the EU’s emergency responses are dealing with the problem before last. Its politicians thought that raising the European Financial Stability Facility to €440 billion would be adequate, but by the time the Bundestag approved this new limit nine weeks later, the number required was perceived to have swollen by another €2 trillion. No one has that amount available, even for a viable proposition. Any such leverage would threaten the debt ratings of every country in the union, raising interest rates across the eurozone, just as everyone says the ECB was wrong to raise rates as recently as July.

In all this gathering darkness, the UK coalition’s economic management of severe cuts in government expenditure stood out as a beacon of sanity in a world gone fiscally mad, but not any more: despite deep cuts to the military and social security budgets (but not to health and overseas aid), the government’s borrowing is still continuing at around £1 billion per day, the national debt keeps on rising and real GDP — that’s GDP after allowing for real inflation of currently over 6 per cent — is now beginning to fall off like everywhere else. The November Budget has been labelled as being one for growth: we wait with bated breath… dum spiro, spero (while I breathe, I hope).

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As 2010 dawned, Spear’s boldly asserted that this crisis was only reaching its halfway stage: the banks had been saved, but only by shovelling their indebtedness on to the taxpayer, and the crisis soon morphed into a sovereign debt crisis. Because of the already impossibly high level of debts wherever you looked in the G7, a double-dip back into recession and Banking Crisis II was all but inevitable.

The sovereign debt crisis itself was clearly going to be a backward-feeding loop into Banking Crisis II, especially for the French and German banks, which had hoovered up debt from the PIGS. Until those figures crept out in May, we could only guess at the amounts: now we know, and it’s frightening. The failure of the second round of stress tests on European banks to include a significant haircut on these shows how little reality the EU can take.

As Madame Lagarde of the IMF has said very stridently, the world economy is peering into the abyss — but it’s been too little too late for nearly two years now, as personified by the ridiculously triumphant Bundestag, fighting the previous battle, passing a bill to raise the EFSF’s firepower by a piffling amount.

This is about as much as the ECB has spent in unlawful buying of Italian and Spanish bunga-bunga bonds — bonds issued for pleasure that are valueless once the party is over — while the politicians ratified their silly little attempt at a solution to their own gargantuan home-made debt crisis.

That, and the fact that the Karlsruhe Constitutional Court has already opined ‘thus far and no more’, means that the final countdown to the global financial Armageddon has well and truly started on both sides of the Atlantic. The only issue is who will get there first, Europe or America? Each is already blaming the other quite vociferously, as both adumbrate action for the other which they are not taking at home, so it might be a good idea to bet against both these dead-beats with a spread on a dead heat. 

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