Why American and EU indebteness mean the Osborne Budget isn’t worth a light 
Liam Halligan has written one helluva tell-it-like-it-is piece in the Telegraph today. The only downside of that is this one from me might therefore look like plagiarism; but I hope not. The more people who present the Truth (as opposed to politically acceptable clap-trap) the better the culture of the West will be.
Anyway, as it happens mine is inspired by some US statistics very kindly furnished to me by a US Slogger yesterday. I suspect I was asleep when he sent them. Most people seem to be asleep when they’re told about such things…if they’re told at all.
This week in the UK, the UK Chancellor George Osborne will present his Budget proposals for the coming fiscal that ends March 31st 2013. Osborne will talk a good game, but while his plans will be analysed to death by every pundit and politician the length and breadth of the Land, they will have one tenth of f**k all effect on what is coming our way.
The two most common things we’re told by the MSM involve national deficit and national debt. The deficit is the annual amount we lose as a sovereign plc; and the debt is what we owe when you add all those decades of deficit together. Most sovereign fiscal management involves words beginning with d. But there is a third consideration that doesn’t begin that way – and it is far more deadly: obligations.
Obligations are things we’ve promised to do, smiling in in the knowledge that we’ll be long-dead when someone says, “Hello…I have this promisory note here….hello?….hello?”
There is a thing called GAAP – generally accepted accounting principles – which of course governments choose to ignore, but which real people apply in the real world. This is what they tell us, for example, about American sovereign debt:
* Total Federal Government obligations stood at $50 trillion by mid 2011 — more than four-times the level of U.S. GDP. These are increasing each year by GAAP-based annual deficits in the uncontainable four- to five-trillion dollar range. Those extreme operating shortfalls continue unabated, with total federal obligations up to $81 trillion—more than five-times U.S. GDP—by the time 2012 got under way.
A trillion Dollars, by the way, is $1,000,ooo,000,ooo. Twelve noughts. One thousand billion bucks.
* In a February 25, 2011 speech, Federal Reserve Vice Chairman Janet Yellen examined the results of the recent use of “unconventional policy tools” by the Fed: “Each of these policy tools tends to generate spillovers to other financial markets, such as boosting stock prices and putting moderate downward pressure on the foreign exchange value of the dollar,” she remarked.
Bernanke is now considering QE3.
* Economic activity in the United States began to decline in 2006 or early-2007, and it plunged from late-2007 into 2009 at a pace not seen since the Great Depression. Subsequently, economic activity has been bottom-bouncing, with some boosts from short-lived stimulus effects (Q1 and Q2). Since then, without any fundamental turnaround in structural consumer-income problems that have been driving the downturn, and with contracting, inflation-adjusted systemic liquidity, the real economy has started to slow anew.
* Beyond the politically – and market-hyped GDP reporting – key underlying economic series show patterns of activity that are consistent with a peak-to-trough contraction in inflation-adjusted activity in excess of 10%…..ie, a formal depression. (See earlier Slogposts on this very subject)
* As heavily touted on Wall Street, the official version of the current U.S. economic circumstance is that business activity is enjoying normal growth, having recovered to levels last seen before the severe recession of 2007-2009. Main Street U.S.A. is not, however, seeing this near-perfect economic environment. Crucially, the consumer accounted for 73% of reported third-quarter 2011 U.S. GDP. As I have posted until I am blue and occasionally purple in the face, if you import far too much stuff, consumer retail uplifts only make sovereign debt problems worse.
Why does any if this matter to Brits? Well, the US is our No 1 ally (allegedly) and the only nation beyond China capable of at least containing Islamist madness. And while much of its system has been hijacked by over-lobbied pols and braindead bankers, it remains the one beacon left on the planet with muscle whose Constitution says we’re all supposed to be equal before the Law. But none of any of that matters: if we sink, no Special Relationship is going to offer us so much as a soggy straw. No, America’s inevitable future meltdown is important only as a slap across the face of smug Limeys everywhere: the EU is a mess about to release appalling CDO contagion, and the US will be an even worse traffic-accident in time. What these alarm bells tell us is that we either make our own way in the Brave New World, or we will collapse into Third World chaos.
In that context, I find it impossible to take this week’s Budget presentation seriously. As Liam Halligan so perceptively observes:
‘Osborne and Co have laid out a relatively credible deficit-reduction path, yes. But the entire programme, we must never forget, is cast in terms of reducing the deficit, not the debt…. our national debt won’t really be around £980bn this year, as this figure excludes the so-called “fiscal interventions” that bailed out our world-class banking system. Include those, the bulk of which the Treasury has kept off the books, and we’re looking at UK debts, at the end of 2011/12, of around £2.2 trillion….and let’s not forget either those massive, unfunded public-sector pension liabilities, amounting to another £1.1 trillion or so, and the hundreds of billions of pounds of Public Finance Initiative debts…’
This is not the ‘negativity’ of which an Italian Slogger accused me last week – it’s cold, diamond-hard reality, courtesy of mentally incontinent bankers needing a bonus, and crooked Whitehall mandarins in search of a feather-lined retirement bed.
There are two simple reasons why many contemporary economic and investment forecasts are wrong. The first is that a surprising number of even quite sophisticated forecasters spectacularly underrate the degree of sovereign and banking evil out there. The second is that they will often use historical comparisons and valuations, without realising that the current era is not just ‘another correction’. We are witnessing something now that future educators will bore the backside off their students about: a qualitative step-change in political, social, economic, financial and cultural values. There are no parallels for this: and using them only confuses the issue.
We have all brought this upon ourselves. Home sapiens tends to be very bad at three things: resisting a flutter, being realistic about the future, and spending less than it earns. The totality is called denial I suppose, but our culture has exacerbated the ex-factory wiring problem by discouraging a sense of personal repsonsibility and the importance of ethical standards. 21st century man is absolutely useless at envisioning consequences.
There is a very good chance we are going to see a cynically planned inflation massively accelerated by a stupidly unforeseen inflation. Together, they could end up making the 1923 Weimar event look like the Eisenhower/Macmillan calm of 1950s Britain and America. The key factors here are political weakness and – stemming directly from this – a rising awareness in the banking elite that the only way to cope with consequent debt is to inflate it away. But the one mega-fact missed by all these snake-oil salesmen is that inflating the debt away ruins the consumer…..and without that consumer, there is nothing: no recovery, no growth, nothing.
Once one clears away the cans lying down the road, things look pretty awful. That consumer left out of the neocon equation is going to have to become a skilled and committed producer. I’m sure regular Sloggers are fed up of hearing this, but the future of the West lies not in the multinational globalist output volume model of Devil-take-the-hindmost capitalism. It lies rather in the small-unit community mutualist-influenced model dedicated to values of production satisfaction, and the marketing imperative of margin, not volume. The East wants what we have to sell – be it Purdey shotguns or beautfifully made pottery – and the sooner we realise this, the better. Because high margin x Chinese population = our survival.
So excuse me if I don’t pay too much attention to what Draper Osborne says this week. To be frank, the bloke is just another high IQ idiot lacking in the life experience and Renaissance appreciation vital to a firm grasp of what the future brings. Much better to keep an eye on those Brussels signals, Greek reactions, Goldman Sachs outlook papers and Tim Geithner soundbites. They won’t tell you for certain what’s going to happen, because nobody knows that. But they just might hint at what the next dumb idea is likely to be.
Related: A World on the edge
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