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October 8, 2009

Wobbly-W and Wobbledy-Gook

By Spear's

The world economy is not on an incipient roll as the politicians and central bankers would have you believe; it’s on a wobbly-W as they speak wobbledy-gook

THE WORLD ECONOMY is not on an incipient roll as the politicians and central bankers would have you believe; it’s on a wobbly-W as they speak wobbledy-gook. To be precise, the economy is perched momentarily on the spike in the middle of the W; come October, it’ll probably be on the way down to the bottom of the second dip of the W, as the new jargon of a backward-feeding loop kicks into a world where no banks are worthy of the name.

Yes, it’s now confirmed that the recent stock market rise was based on a short-term inventory replacement kicker that has already run its course. The Keynesians and the Monetarists are beginning to see this, somewhat uneasily but differently, as they contemplate the massive levels of public debt and the undisciplined extent of QE respectively and realise that their solutions have both run out of road.

Mervyn King, ever a reluctant QE-er whose reminder of the ‘Moral Hazard Territory’ was trampled underfoot by these reflationists, recently baulked at deploying the last £25 billion of the Treasury’s £150 billion quota of QE, not least as this would have been used to support the gilts market as opposed to buying up private debts as adumbrated by JMK. Mervyn, you see, thinks the government has created more than enough debt on the one hand, and sees no evidence that QE is working on the other, other than encouraging the government to add yet more debt.

The Keynesians and the Monetarists should contemplate instead that their credos are about to cause a major imbalance in both the US and UK. Both economies are about to tip into a public sector which is more than 50 per cent of the whole, while the private sector that pays for it all slips below 50 per cent. Welcome to the new Democratic-Socialist paradise, in which repayment of debt is conveniently not on the agenda, until it is, which in the UK is usually IMF time.

The banking crisis started the global recession. The authorities claim they have saved and stabilised the world’s financial system. They have done neither, but they have induced a temporary calm, a calm before the next storm. The IMF reckons that the US and UK banks are under-capitalised by around $300 billion each; BaFin, the German bank regulator, reckons its banks have €860 billion of toxic assets and are short €260 billion capital.

AND IN CHINA, the state has ordered the banks to lend aggressively, around £600 billion so far this year, but much of this lending has fuelled a 65 per cent speculative rise in the Shanghai Bourse, which now trades on a p/e of 30. Only the banks in Arabia, India, France and Holland can be said to be operating anywhere near normal. Everywhere else, the banks are lending nothing, for the simple reason they’ve got nothing spare to lend, as they’re trying desperately to de-leverage instead, but they’re not achieving much of that in this climate either.

So Q3 will see some nasties. First, the German elections on 27 September will be the end of their bankers’ game of hide the losses; the east European currencies pegged to the euro will come under further strain and may snap, causing huge losses (up to $1 trillion for the west European banks if those eastern pegs do snap); then the Irish referendum on Lisbon will follow early in October; and so on. October is always the worst month for dashed hopes and for wobbledy-gook economics to fall apart, as the green leaves of recovery fall to earth.

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By Christmas, it will be clear that we are not out of the recession anywhere in the world and that meaningful growth will not resume until 2012 — at least that’s what the NIESR has just concluded for the UK, but they are not politicians or central bankers, just a think-tank that’s done some clear thinking.

In fact, we may as well admit now to something that we have assiduously avoided saying so far for over twenty months, but which we all but knew was unavoidable: this global slump is now beginning to echo 1931–32 more closely than can any longer be considered comfortable. It was the collapse of Credit Anstalt Bank of Austria in Q2 1931 that triggered the second wave of depression then, but that was nowhere near as big as the massive potential fall-out from the eastern fault-line in the Eurozone now.

The difference this time is we are all in a truly global slump together, with America not about to lead the rest of the world out of the morass, as Uncle Sam is bust and is saving, not spending. The year 2012 now beckons from the middle distance, on the far side of a longer valley than most of us ever thought we would have to cross. 

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