...As we know it.
The Eurozone is bust. Either Germany must shoulder the financial burden of the Empire she has desired since 1871 or the Eurozone must break up into two or more parts.
The USA is reaching the limit of the capacity of the markets to accept its borrowing, and while yields remain low in the AAA rated countries for now (which S&P's show-boating aside, the USA still is), loose monetary policy for most of the last 2 decades means inflation is catching up. If inflation expectations become entrenched, there is no way investors will accept negative real yields as German, British and American government debt currently is. Any monetary stimulus will be short-lived. Swiss debt is now trading at a negative yield BEFORE you adjust for inflation. The "Flight to quality" is smashing the economies of Southern Europe. So Fiscal "stimulus" even were it possible, is utterly unsustainable.
The Euro is a mere distraction to the end of the fiat money system ushered in by President Nixon as a response to the cost of the Vietnam war in 1971. Since that point, inflation has been rampant. Credit expansion, both public and private has fuelled a boom, which has raised living standards. A population bubble, the Baby-Boom stoked up asset prices around the west, but are now downsizing houses and liquidating assets as they retire.
Ideological adherents to Asset-Backed money, free-banking and so-on, or Gold-bugs will not get their way. But Governments are going to have to act more like their currencies are asset-backed. The days of inflationary growth ever eroding never-ending deficits are over. Government as spender of last resort is finished. The Tea-Party caucus in the house of Representatives, head-bangers though they are, have just secured a pivotal victory which makes the debt-ceiling a political tool to weaken the executive. That this was done BEFORE the market turned against the T-Bond is heartening. History will show that as the Turning point. We in the west will remain rich but the effortless credit and Government debt boom is over. It will take several years for this to sink in, and Government will learn to live within it's means, or destroy economies. This is as true for the USA as it is for Greece.
Our Coalition gets it. The Tea-Party gets it, and forced Obama to do so too, so the UK and USA are OK. China and India are growing fast as their per-capita wealth catches up (a process which will take a century or more). Will Europe get it? That is the short-term question - with Long-term implications.
Monetary and fiscal "stimulus" however large will be but a sticking plaster on the gunshot wound of the much larger effects of the end of a 40-year credit cycle. This is the reality: either we can bring public spending under control at the risk of deflation as asset prices fall and banks collapse, or we can have inflation eroding the real spending power of money to reflect the smaller economy. Either way, living standards must fall to reflect the fact that we've been borrowing from our futures for decades and we (yes you and me) are being asked to pay. We, generation X, have to buy houses off the Baby-Boomers at inflated prices, pay for our own pensions, and their pay-as-you go systems which we will not receive. Their shares went up from 1979-2000. Something we are unlikely to enjoy. We will NEVER get out of debt, not till our parents die, well into our sixties.
We stand at a cross-roads. Financial, political (the rise of the East) and technological (this post is worth re-visiting). We have an opportunity to create a rich, free and dynamic society if technology is embraced to make Government the servant of people, not it's master. The only hope is that public spending cuts and supply-side reform can re-invigorate a dynamic and entrepreneurial economy. But the Minimum-wage, the political impossibility of financial deregulation post Credit Crunch, and the idiotic parties of the left will make this very, very difficult. I remain an optimist, but a new financial order does not come painlessly. The question is - are we 3 years into a great recession and through the worst, or are we about to go into the real dip as major currencies implode? Anyone who thinks they know, is wrong.
Thursday, 18 August 2011
...As we know it.