Thursday, 18 August 2011

It's the End of the World...

...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.

Thanks, Dad.

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.



7 comments:

Duncan Pringle said...

Forgive my ignorance but if every country is in debt who are they in debt to? If each other surely governments can write off each others debts. If it's to the banks then, Hello! didn't we just bail them out? Banks trade debt so how about refinancing the debt and selling it to their already wealthy investors.If none of this applies then surely they( the relevent countries) need to rein in their expenses eg. bring all of their troops home and any other unnecessary revenue sapping exercises. I realise I may have over simplified the complex global economic crisis but that is clearly because I don't understand it. How can every country be in debt? Who to?

Single acts of tyranny said...

This is a quite brilliantly insightful post.

I am not sure our politicians are willing to say so just yet, but the logic is relentless.

Again, great post.

Mr Ecks said...

Some of what you said is valid.

This however:"Our Coalition gets it" is utter shite. These turds are a big a bunch of losers as the scum of ZaNu befores them.

Economic collapse is coming and ALL the political shite have not a clue and are stupid and malicious filth if not downright evil.

Just as much as any Labour voting trog your continued support for the Tories marks you as tribal fool. Whatever hope you have, abandon it. Less than 18 months have shown us all there is nothing to hope for from the Coalition vermin but more treason and betrayal.

Mark said...

"We, generation X, have to buy houses off the Baby-Boomers at inflated prices"

For the record, I bought my flat for £43k in 1989. In the few years prior I heard a lot of this permanantly high house price shite and then (as now I believe) there was something of a fad for people grouping together to buy a house, the joint proceeds of its inflation intended to be their "step on the ladder"

In the mid 90s, a flat above mine, identical pretty well, was on the market at £19k and it didn't get a single viewing in three years! I believe it went for £17k eventually.

The magnitude of the 90s crash (60 odd % in my case which I don't think was untypical) seems to have been airbrushed out of history (or at least significantly understated)

A couple of years ago it was around £100k. I don't know (or particularly care) what its value is now.

I think you'll be able to afford a place fine in a few years. You just need to develop a little patience boy!

Jackart said...

Mark, I own so I'm not complaining on my behalf.

Mr Ecks, The coalition are comitted to cutting the public sector. Be realistic, they aren't like the head-banging incompetence of Labour.

Duncan Pringle. Most countries are in debt to their own people and the Chinese.

Mark said...

I stand corrected. Mortgage free at 30, well done. I was 46.

But having said that, how do we get property back to being what it should be - somewhere to live - rather than the never emptying ATM that far too many people see it as.

Southerner said...

Actually, I've recently become more hopeful about the future. It seems very possible to me that expenditures on education (here in the USA) may be peaking, and may soon begin to decline. With a $189 Kindle, you have most of what you need for a great education. Wish that it had been around when I was younger.

There have been some fascinating new products developed in the past few years that help older people and the handicapped continue to live in their own homes, with family members getting email alerts, etc., if granny doesn't get out of bed at the usual time or if she falls in the bathroom. A huge percentage of "medical costs" incurred in one's lifetime are incurred in the last two years of life. With enough innovation, a lot of these costs can be avoided.

People used to be treated for YEARS for ulcers, which often never got better and usually did not get cured. When the crazy Australian guy infected his own gut with bacteria, gave himself an ulcer, and then cured it with penicillin, his advance in knowledge set people free from "ulcer management" forever. There are other medical problems that used to be treated with surgery that are now treated with pills.

It may turn out that we are nearing a point at which the lifetime cost of providing medical care for people will also start to level off and then decline. (Although allowing immigration of foreigners with female genital mutilation and incestuous/consanguinous marriages into the country is a big step in the wrong direction, as FGM leads to complicated deliveries and incest leads to extremely serious birth defects.)

The pension system will never be as juicy again as it has been in recent years. Ditto for cradle-to-grave welfare.

If nuclear fusion or whatever it is turns out to work, we're sitting pretty!

There was an error in this gadget