The paint is not quite dry on the global economic canvas. For the time being, it’s merely tacky.

News management will never be a substitute for real reform.

For reasons sometimes obvious but often murky, national media in the West seem at times to have fallen into the ‘don’t talk things down’ demand always made by those who have failed. Examples include the FT’s enthusiasm for all ideas about the eurozone crisis (Wolfgang Munchau being an outstanding exception), the Telegraph’s never-ending faith in America (Ambrose Evans-Pritchard just as honourable an exception), Le Figaro’s admiration for every financially illiterate statement by Christine LaGarde, the BBC’s inability to break any story that contradicts Downing Street, the boundless confidence of the Washington Post in Obama’s ability to recover lost ground, and the Wall Street Journal’s lack of interest in any important signs of disaster not directly connected, oddly enough, with Wall Street.

It all feels rather tacky to me: after all, it’s not just incompetent journalism by a long chalk. Despite daily streams of data and calculation showing that banks are undercapitalised and overlent, the stock markets are ludicrously overvalued and gold undervalued, nobody in authority has any new ideas at all – and those out of favour are dismissed and/or smeared – the choo-choo train of it is alright it is alright it is alright chuffs along on its journey across the detonating bridge.

There is nothing President Obama can do to stimulate the US economy or control the deficit. He is tied to Bernankerist QE for the first problem, and stymied by his promises for the second. Even were he to try and get out of his self-administered prison sentence, Congress would stop him with the debt ceiling.

There is nothing George Osborne can do to stimulate the UK economy or control the deficit. He is tightly controlled by the lack of  economic restructuring, an empty Treasury, and the deficit itself for the first problem; and weighed down by EU membership and the Tory Right on the other. Even were he to try and force another QE on us, the independent Mervyn King would stop him by threatening to resign.

There is nothing Angela Merkel can do to stimulate the EU economy or control overlending banks and overspending governments in the eurozone. She is hoist by her own German economic success, the euro itself, and the leaden, expensive eurocrat overheads for the first problem; and by her own electorate and a long-ago bolted horse for the second problem.

In another time with fewer complications, one man – Franklin Roosevelt – came to the world’s rescue….too late to stop the accession of Hitler, but just in time to stop the global economy disappearing beneath the quicksand. Historians argue back and forth about what if anything FDR really achieved, but he gave hope and took urgent reforming action. These are the elements we lack today.

All three currency zones described above are hopelessly divided. In the US, a fight on Federal Power & cost v Individual responsibility is in danger of shifting the Federal Government into neutral, with the Tea Party grappling for reverse gear. In the UK, the sterile ‘Cuts v Growth and what’s Plan B?’ debate continues circling around a vortex of debt: the country and both governing Parties are split down the middle, and Unite and the teachers’ unions will fight tooth and nail to stop government policies from succeeding. In the EU, the ‘Federalised Germanised EU v autonomous members’ war cuts France and Germany off from everyone else, with the possible exception of Holland.

This is in turn all happening against a background of falling confidence in the ability of central bankers to address the problem. As the New York Times observes this morning, “Many of them are confronting the prospect that their powers are on the wane, as inflation begins to creep up and growth is hampered by high levels of government debt”.

Mervyn King himself acknowledged this during a speech last month, observing, “monetary policcy cannot alter the fact that, one way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis, and the subsequent rebalancing of the world and UK economies.”

As King has said of the banking arena, if you were trying to sort things out, you wouldn’t start from here. Things won’t be sorted out for many reasons – but for three above all others.

First, politics and elections. Obama, Merkel and Sarkozy are all in bad shape, and defending their own turf. The UK Coalition doesn’t face an election; it faces something worse – trying to keep the Tory Right and LibDem Ministers onside at the same time, because either could quite easily bring the whole thing crashing down. The Congressional GOP in America has the same power over Obama. Merkel has a badly-split Party and a truculent electorate to face. Sarkozy has the worst opinion poll numbers since De Gaulle after the Algerian volte-face in 1958.

Second, everything from no taste for reform to bitter opposition to it. The banking sector (beyond central banks) is key here. It has diluted every medicine offered, and filibustered every proposal. But where local needs are important, the politicians have been behind them in this. Sarkozy doesn’t want a banking revamp run from London, and the City doesn’t want it emanating from a Franco-German controlled Brussels. In the US, Wall Street – whose alumni are stuffed into every key regulatory department of government – cares nothing for America the nation State, or the average Leroy and Whitney. A vigorous campaign to reposition regulation as a deadly strain of anthrax began the day after the taxpayer bailed it out, and has continued unabated ever since.

Which brings me to the final reason: culture. Just about every cultural fault that could get in the way of reform is present at every level of this unholy mess.

A banking culture driven by selfish greed and testosterone. An economic culture with so few ideas, it invented the jobless recovery. A consumer culture ready and willing to accept the irresponsible credit sold to it in return for material benefits. A media culture more interested in bread and circuses than issues, and too lazy to look beyond the spin of briefing packs. An energy exploration culture devoid of ethics, and prepared to do any deal with any rogue on behalf of the shareholders. And a political culture in every one of the States involved that long ago stopped listening to the complaints, needs and aspirations of its citizens.

Or, in a word, globalism.

I will give you – as dispassionately as I can – the rough order of falling dominoes. Not many names and no timings, because those really are anyone’s guess. Just the inevitable sequence that must once and for all bury the idea that a global system of free-trade mercantilism can produce anything other than financial, geopolitical and ecological disaster in the end.

Economic growth not cutting it…..QE being seen increasingly to fail…..rising long-term bond yields…..a sovereign default….rising short term bond yields….stock markets topping out, weakened by the safety appeal of long bonds….Chinese overheating and unrest….a gold breakthrough to $2000….big bank failure….falling Chinese demand for raw materials….property collapse and output blows for Australia….loss of investment faith in the EU’s ability to stabilise the eurozone….bailout for a large EU member….US election unsettling investors even more….collapse of stock markets….further EU bank collapses….loss of German patience….huge fall in demand for Chinese goods, import-led inflation out of control among weaker currencies…..rising interest rates and static growth…..stock markets plunge…flight to Swiss Franc and Yuan….exit from US dollar….stampede out of Euro….Beijing calls lending halt and raises rates further to control inflation….Australian economy collapses….more EU defaults, first sovereign bankruptcies, widespread social unrest….rising inflation in the West, huge deflation in China….output falls globally….further bank failures….deflation contagion….slump. EU collapses…..Britain defaults, US devalues….China bitter at her deflated investments…geopolitical tensions….stock markets at rock bottom, insurance/pension companies in trouble….most currencies worthless….Global Summit….worldwide write-off…..new territory….

For those dismissing this as a fantasy, I offer below some representative quotes from leading bankers, economists and other interested parties from around the world this merry Monday. They still shrink from facing the awful truth and writing the unwritable, but between the lines there real feelings are often apparent.

It is a myth that avoiding quick-drying paint to illustrate the crisis will help it. It will merely prolong the agony until the real denialists can finally by incarcerated in the insane asylum, and the world economy restructured to suit a new age with new needs.

 

‘The headline news that just 36,000 [US] jobs were created was undeniably atrocious, and much less than the market expected”. (Felix Salmon, Reuters)

“The planned [Federal] savings of a billion or so will not make a dent in the growing expenditure line…there is no way the US is going to make any real dent in the deficit unless social security, Medicare, Medicaid and the Military are put on the table to be sliced up”. (Bruce Kasting, Zero Hedge)

“It is hard to estimate the exact amount it will cost to recapitalise the European banking sector. I have heard a credible estimate of 100-200 billion euros…[but] the EU fears genuine stress tests conducted by the EBA in London might disadvantage their banks [and] committing the money to nationalise and recapitalise the banks would be very costly”. (Wolfgang Munchau, London FT)

“In all, 20 EU countries at Friday’s summit objected to the Germanization of their countries for one reason or another. So Germany refused to sign on to an increase in the size of the eurozone bailout fund. ‘It was a truly surreal summit’ commented Yves Leterme, the Belgian Prime Minister'”. (Irwin Stelzer, Wall St Journal)

“These things are costly for the German taxpayeer and highly unpopular. It [recapitalisation] will only be politically feasible when everyone sees this as the only way out. The euro crisis will go on and on”. (Ulrich Leuchtmann, Commerzbank AG)

“As for the issue on which [Mervyn King] has most closely staked his reputation – that Britain’s large banks must increase capital levels well beyond inteernational standards – he has so far been ignored….the main topic of debate is how much longer [the MPC] can resist the pressure to raise interest rates.” (Landon Thomas and Julia Werdigier, New York Times)


24 thoughts on “The paint is not quite dry on the global economic canvas. For the time being, it’s merely tacky.

  1. Pingback: Tweets that mention The paint is not quite dry on the global economic canvas. For the time being, it’s merely tacky. « The Slog -- Topsy.com

  2. High time for a meaningful rise in base interest rates. 2% would be a good start. That would start the process of economic reform, currently in suspense while MK tries to decide what to do. You can’t reform an economy while trying to protect the very people who caused much of the problem.

  3. 2 percent? Inflation at nearly 5 percent.Sound money is the cornerstone of a democracy in that those who save are not taxed, also ,by the failure of the MPC to get anywhere near their official remit.Why not start with 4 percent now,firm up the currency, and return house prices to a normalized level,so that the first time buyer returns from extinction?

  4. “There is nothing George Osborne can do to stimulate the UK economy or control the deficit. He is tightly controlled by the lack of economic restructuring, an empty Treasury, and the deficit itself for the first problem; and weighed down by EU membership and the Tory Right on the other. Even were he to try and force another QE on us, the independent Mervyn King would stop him by threatening to resign.”

    Bite the bullet and pre-emptivly sack him?
    Its later to unleash my stimulus “gotterdamerung” by monetising the entire National/Pension/NHS/Welfare debt than I’d like, but I’m still not seeing other options.

    “Why not start with 4 percent now,firm up the currency, and return house prices to a normalized level,so that the first time buyer returns from extinction?”
    Because that would put most home owners interest rates up to 10% whilst simultaniously driving them into negative equity.
    The Housing market would collapse, the defaults would bring down the banking sector, and a few “robber barons” who saw it coming would buy up hundreds of houses for a couple of grand each, and be strung up from lamp posts by the former owners.

    • Only the real thing, but you can’t get it. I have a gold note now, and keep moving it around from one potentially insolvent group to another. The trick will be to exit before it all goes up the pictures…but then the question arises, what currency to put it in?
      Probably the Yuan.

      • “Only the real thing, but you can’t get it. I have a gold note now, and keep moving it around from one potentially insolvent group to another. The trick will be to exit before it all goes up the pictures…but then the question arises, what currency to put it in?
        Probably the Yuan.”

        I’d like to do the same thing, any chance of a beginners guide?

      • ~Rightwinggit
        First step is to find a wealth management company that knows what it’s doing. They can then negotiate with the funds-desperate bank of choice that month.
        The gold price went back up a step to $1364 today, but that is still cheap as chips.
        I’d recommend a company to you but I’m not licensed for that and yuo mustn’t take this as a formal investment recommendation from me. I’m simply telling you what I’ve done and what I think.
        Good luck

  5. So many others who are learned and active in the markets agree with you Mr Ward.Even the boss agrees so much so that his yatch in Chelsea harbour now has a huge safe and a permanent staff.
    My meagre savings and pension are going to be toast and there is little I can do to save it.I am assured on other blogs that my saving and pension will be confiscated-oh bother!I ought to stop,the language in the kitchen is now blue!

  6. Mac
    I provided my thoughts.
    If you disagree, please explain why, if you simply dislike the facts, I find life sucks a little less if you give up all hope.

    • TRT:
      I know we’ve discussed this before but ISTM you assume that if IRs were raised to proper market levels, every person with a mortgage would immediately be plunged into negative equity.
      I see no evidence for this because IRs were not at 0.5% when they took out their mortgages.

      Those that would fall into that category failed to evaluate their buying decisions correctly by not leaving an adequate financial buffer. They should complain to themselves for being greedy, not to savers/taxpayers.

    • TRT,
      I think BT has provided an eloquent explanation of what I meant. But there are still a couple of points to mention.

      I don’t believe the bulk of the market is staring at negative equity even with a sizable market correction. Most people I know buy a house to bring their family up in and that is a normally a lengthy process, taking out most of the peaks and troughs of market mania. This is something I think houses should be used for instead of speculative investments which destabilise the intent. Adding in people’s normal intransigence to move their accounts never mind homes and the near impossibility of first time buyers entering the market over the last part of the cycle would suggest there is a sizable element who are not about to be bankrupted.
      We then have to consider a class who saw ‘paper profits’ and used that to subsidise a lifestyle their normal economic activity couldn’t sustain, in more or less the same way investment banks have done. That new car or 5 star holidays have to be paid for somewhere and preferably by the people who bought them.
      The reason house prices are being held at artificial levels with prudent savers being gutted is that the Gov need their asset prices to keep the AAA debt rating and interest rates remain at absurd levels to maintain something like cheap UK debt repayments. Neither will last.

  7. “Economic growth not cutting it…..QE being seen increasingly to fail….etc etc etc…Global Summit….worldwide write-off…..new territory….”
    ————————————————-
    Hell…..do we really have to go through all the torture before the pols face reality and start talking about the big write-off?

    As one of required actions, I cannot see any other solution to it that won’t keep global economies depressed for a very long time. But as previously said, this will usher in a transfer of global power/influence from West to East.

    Another action is to normalise IRs over the next 12 months. By end 1Q/2012 UK rates s/b about 5%.

    A third action is to sack Merv for presiding over the credit bubble.

  8. Relax,

    I, unlike the boy Nick and his opposite number Edward the unlikely, do have a plan. It’s a proper plan too and it has an edge. Just needs a little despair to set in, perhaps a lot of despair to become the norm, so it’s finally appropriate to term it total despair!

    Only then will the acronym “VAEC” have meaning.

    “VAEC” will be the chant of the masses. “VAEC” “VAEC”

    It’s simplicity will become the marvel of intellectuals, it’s functionality the renaissance of human endeavour. Perhaps even the trigger for the launch of the much vaunted big society, co-existing within an even bigger one.

    In the words oft quoted by media ‘you heard it here first’!

    Albeit for the second time, here in the Book of John.

    VAEC!

  9. BT
    Mortgage rates are currently 5% over base.
    When most people took out mortgages, they were 2% over base.
    Increasing the base rate doesnt bring down the bad debt surcharge.

    William specificaly said return house prices to a normal level.
    If you borrowed 5x salary with a 10% deposit 5 years ago, your unlikely to qualify for a 75% mortgage of 3x salary.
    No remortgage = svr
    svr = 7% over base
    base of 5% = default.
    One default begets another.
    The sensible savers buy distressed assets and are rewarded with summary execution.

    • TRT:
      Not all mortgage rates are 5% over base and not all mortgages were at 2% over base when taken out.

      Even so, 5% is too cheap relative to real inflation at this time and is simply intended to protect those who over-mortgaged themselves, very often for reasons of greedy speculation, during Brown’s unsustainable credit/property bubble.
      I see no moral/financial justification for protecting those people when the investment was essentially a risky business transaction. If people do not learn from their own greed, then from who’s will they learn?

      The 2% rate you mention was intended by banks to aid/abet Brown’s credit bubble. Those who jumped on the paper-wealth gravytrain should have considered that mortgage rates and property values can go up as well as down.

      Consider this: if 95% capital gains tax (adjusted for inflation) was levied on prime homes, would many of those people still have over-mortgaged themselves to buy the most expensive property possible? I think not.
      Further, would those same people donate their anticipated capital gains into public funds? I think not. That must tell you something.

      Whatever, your comments are still based upon the desire for mortgage holders to be cushioned and for the brunt of the painful correction to be dumped onto savers. You know – they’re the people who didn’t cause the credit bubble by speculation.

      IMHO near-zero rates are contrary to what’s required to normalise the economy.

      All in my very humble opinion, of course :-)

      • Bankrupt Taxpayer.
        I dont disagree with you, what you are saying is idealogicaly correct.
        But the Horse has already bolted.
        You cant shut the stable door and claim to have solved the problem.

        Someone has got to take the pain.

        You can either jump back into Strong Money and liquidate the very over mortgaged, followed by the mortgaged, followed by the banks and eventualy serve a destroyed nation and 20p in the £ to the savers.
        Or you can murder the savers through inflation, and I accept murder as a literal charge, many will die.

        The savers are screwed either way, they can lose their money through inflation, or through sequential debtor, bank and government default.

  10. TRT:
    Sure, the horse has bolted. We are now trying to catch it and solve the problem.

    The correct actions are measures which affect the ‘innocent’ the least and will have lasting beneficial effects on economic activity. But as a Hard Left coward, Brown took the path of least resistance by screwing savers and helping those with mortgages because they are more likely to be Labour voters. My neighbour is now repaying his mortgage by an extra £500pm thanks to near-zero IRs.
    If he popped in to say “thanks”, I’d appreciate it.

    I don’t accept that most everybody with a mortgage would be bankrupt if rates were raised to market levels – only those who over-mortgaged themselves and/or ignored the risks through greed. And of course BTLers who jump in/out of the market as it goes up/down and invariably make awful landlords.

    Nor do I accept that savers would be screwed either way. If IRs were raised to market levels, the pound would rise on the FX markets, inflation would fall and savers would have more *real* money to spend in the economy, not borrowed money from constantly remortgaging their paper-wealth. Thus, the possibly reduced GDP for a while would be derived from real wealth, not paper-wealth.

    One action we MUST take in the UK is to remove the paper-wealth property market from being the central driver of economic activity as it’s been for ~25 years. Instead, we need to focus on the creation of real wealth: eg manufacturing and exports. This is not a short term process and does not neatly fall into electoral cycles. Pain will be around for a long time and we should never forget the name of the maniac who caused it: Gordon Brown.

    Current policy will not do that and as things are now, IF the economy ever recovers, it’ll be the beginning of another property boom.

    IMHO, of course :-)

    • Not everyone would be tits up BT, but enough would be to start a lower middle-class revolution….perhaps the first of its kind. It’d be like a sort of Tupperware Party with kalashnikovs.

    • “I don’t accept that most everybody with a mortgage would be bankrupt if rates were raised to market levels – only those who over-mortgaged themselves and/or ignored the risks through greed.”

      Which is a massive chunk of the market.

      “Nor do I accept that savers would be screwed either way. If IRs were raised to market levels, the pound would rise on the FX markets, inflation would fall and savers would have more *real* money to spend in the economy, not borrowed money from constantly remortgaging their paper-wealth.”

      That rather depends how you define Savers.
      I define Savers as people who have savings.
      Those Savings are in Banks.
      Those Banks have lent those savings to the criticaly over borrowed.
      If you force the over borrowed into bankruptcy, you only recover part of the loan, that means you can only part of the the savings, leaving the savers ****ed.

      If you define savers as people who might save money in the future, thats different.

      The UK has an overwhelming level of doubtful debts that are a housing market crash and an interest rate raise from becoming bad debts.
      Any solution has got to deal with that.

      The Titanic has been holed and is going down, talk of adding more life boats when you reach New York isnt a solution.

      • “Which is a massive chunk of the market.”

        I’m not sure what proportion of the market they represent, but I don’t agree that the rest of us should provide support to them…UNLESS they agree to hand over their future capital gains as reimbursement. That would unearth the truth about their real reasons for over-mortgaging in the first place.
        It wouldn’t be too difficult to construct a scheme whereby taxpayer support was reimbursed later on by those who took it up. What we have at the moment is privatised profits and socialised debts. I already mentioned that my neighbour is repaying an extra £500pm on his mortgage at my expense! This is outrageous.

        But I expect that from socialists because they treat taxpayers money as a slush fund, but I don’t expect it from a sane govt, especially one that is preaching the virtues of personal resonsibility.

        Again, I’m not sure what proportion of those people would become bankrupt if IRs were raised to proper market levels. It certainly wouldn’t be all of them. It’s necessary to seperate those that would from those that would simply be left in negative equity or suddenly learn that property is a bad gamble and choose to get out of it.
        The former could use the scheme I alluded to above with savers protected by the govt deposit insurance scheme in the event that some banks got into trouble. The latter would have to take the hit and see it as a lesson in greed management.

    • Rather annoyingly, only deposits over E100,000 were hammered.
      Still, senior bond holders took a beating, junior ones are probably lost out.
      How many Junior Bond Holders in Armagedon Bank are Highly Leveraged hedgies?

      Contagion.

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