CRASHWATCH: Suddenly, the media realise it’s all over.

Bank exposure, oil prices and deficit economics are the bombs in store for those flying global economy

The bad news is, there are no engines. The very bad news is, there’s a bomb on board.

As is often the way with people unable to get real, the banking community seems to have taken lower bonuses after all….and wiped out the loss by simply paying itself more. It’s this kind of behaviour that makes the Vickers Report fairly meaningless, but from a more professional perspective, allowing your staff overheads to rise in that manner – where the discretionary part becomes a contractual fact – illustrates yet again that investment bankers live in Creditland: that place further up from down the road, where everything can be paid for and chickens never come home to roost.

This Easter weekend has seen (largely unnoticed, I suspect) very clear signs that at last the media think the econo-fiscal clock is heading towards midnight. Liam Halligan in the Telegraph – not normally a doom-merchant – wrote a very black piece about the US outlook during the break, and even his usually cheery colleague Jeremy Warner is now having doubts about both the EU and the UK. His piece this morning points out that, ‘It’s now more than two years since the nadir of financial crisis, and despite all the fiscal and monetary support, still UK output remains way below its pre-crisis levels. The economy is failing to show the same “bounce back” capacity it has after most other post-war recessions….’

The same is true in the US, and the reasons are broadly similar: jobs sent offshore, poor marketing, laurel-resting and globalised consolidation have produced structural unemployment throughout the West. So much so, in fact, that The Independent’s Sean O’Grady ran a piece on Sunday outlining ten ways in which Crash 2 might start. There were actually huge gaps in the piece – most notably the relationship between US government bonds and interest rates – but just in case anyone was in doubt, Reuters points out today that 31 US states now have woefully underfunded pension schemes….and the gap has increased by a staggering 26% in the last year.

At least a dozen US states are technically insolvent, and projecting forward from where we are now, there is every reason to expect that our local government units will go the same way – albeit massaged along a little by those with a political motive. The Coalition cancelled the council tax property revaluation, and froze council tax formally, when it came into office. Excellent for votes, but bad for deficit reduction – and catastrophic for local project financing: remember that after 2007, Labour quietly slashed the grant to local authorities from £44 billion to £29 billion. So one day soon, local taxes must go up, and service levels come down. Neither of these are what you’d call moves to stimulate employment and the economy.

The short-term development which may well clobber everyone is the rising oil price. Since January last year, petrol prices in the US have risen by nearly a quarter, and crude oil by a third. The Arab Spring and the Japanese post-earthquake nuclear disaster have reduced the oil available and made its future use likely to rise respectively. However, neither outcome is at all certain in the long term, and as ever there re strong suspicions that oil’s price is being partially hiked by a combo of deliberate under-production and dishonest price-setting.

The Obama Administration has set up a new working group to investigate the accusations already flying around in Washington. Comprising representatives from the agriculture, Treasury, Judiciary, Federal Reserve, Commodity Futures Trading Commission and attorney-general’s office, the group expects the worst. CFTC head Bart Chilton told the media, “I look forward to the group’s work, especially in rooting out fraud, abuse or manipulation in the energy markets. I remain convinced that excessive speculation is a part of the problem, and should be part of the group’s focus too.”
The knock-on effect of higher oil prices is rarely understood by the layman. Apart from being highly inflationary at the factory gate, it also has a direct effect on food prices, as so much of the food we eat today is transported long distances. We should’ve laid more land to cereal production years ago in Britain, but of course we didn’t; so we in particular will be hard-hit by this factor – as will our ageing population in care who need constant heating, and their children paying the residency fees.

With the two main Anglo-Saxon  political elites in the West grossly underestimating (or hiding) the size of these problems, it wasn’t surprising that S&P decided to take a swipe at the bigger of the two – having downgraded the smaller one two years ago. Much more disturbing to me, however, was the way the US elite reacted: either by shooting the messenger, or in Geithner’s case, with a shrug and a “Yeh, whatever”. There is something about Western government at the moment that makes me wonder if its luminaries haven’t already stocked up on beans and gold, after buying secluded estates in the mountains somewhere. Certainly, I don’t buy all this bollocks about S&P wanting its downgrade to be a self-denying prophecy. It looked to me like a perfectly sensible commentary on a nation gone mad.

The business media are billing this as a big week. Tomorrow, the UK’s quarterly gdp figures will emerge from the ONS, while on the other side of the Pond, a little later Bernanke will be giving the world’s first talkie from the Federal Reserve. For myself, I don’t think these numbers matter any more. After all the speculation about where Crash2 might begin, in the end it was S&P which fired the starter’s gun. From now on, the race to the bottom is under way.

21 thoughts on “CRASHWATCH: Suddenly, the media realise it’s all over.

  1. The level of sovereign debt around the world, particularly in the US/UK/EU is so vast that it’s difficult to see how it can be neutralised and brought under control without suffering a fully blown collapse in the economies and societies of countries affected, which in turn will affect all the others by a process of knock-on contagion.

    Apparently, this is what governments are trying to do but as you often mention, it won’t work, it cannot work. Any possible solution is worsened by the vested interests of those in government charged with doing it.

    If one discounts the likelihood of a global debt write-off (consequences unknown), Crash II will happen at some point and we will see anarchy on the streets coupled to wealth destruction, rising unemployment, poverty and homelessness et al.

    At some point, strong leaders will emerge who promise to deal with the mess and rebuild their nations. The only candidates will be very top-down authoritarian, prescriptive, socialists: ie fascists. They will blame the crises on the “capitalist system” whilst carefully denying their own central role in creating it in the first place by their own incompetence.

    I feel sure that what we know as western liberal democracy is coming to an end. In 100 years it will be looked back upon as an experiment that didn’t work.

    my 2c

      • I don’t know if inflation will soon get a life of its own. It has a habit of doing that. But the inflation we see in the UK and elsewhere is a part of a solution that governments/central bankers are imposing on us to reduce the value of their sovereign debts. Merv King in the UK claims that higher int/rates would have little/no effect on our current inflation because it’s imported. That’s utter nonsense and he’s lying. His MPC is now losing all credibility.

        Recent talk in the UK that IRs will soon be notching up have been dashed after today’s GDP figures showing a trivial 0.5% increase for 1Q2011, meaning that average GDP over the last 3 quarters has been negative despite record low IRs and QE.

  2. ‘’allowing your staff overheads to rise in that manner – where the discretionary part becomes a contractual fact……..’’

    It’s not just investment bankers living in creditland, who can forget our then Iron Chancellor raiding pension pots to use in the NHS, as he put it. Everyone thought he meant build new hospitals or invest in the latest equipment but no he allowed the bulk of that money to be used in salary increases thereby increasing the cost base going forward for little or no productivity gains. I do hope that is on his résumé for the IMF post because from then on we had to be sprinting just to stand still.

    On a personal note I remember a vocal local councillor standing up at a public meeting saying he and his party wanted to double our domestic rates. After the applause died down I stood up and said ‘’well I want to be paid more, so tomorrow I will go back to my business and double all the shelf prices and that way I will double my salary.’’ The blank faces said it all so I then told them that it doesn’t work that way, I will have effectively bankrupted myself because no one will buy my stock because it doesn’t represent value for money, I have made myself uncompetitive. I knew then we were onto a hiding for nothing!

    As for ONS figures does anyone believe them anymore? Even with the bias built into them we have needed a microscope to claim we are out of recession……………

    • Brown would be ideal for the IMF as its real purpose appears to be to transfer state assets to multinational corporations, suck personal wealth from citizens and generally keep countries weak and subservient to US interests and dogma.

  3. I think its unfair to blame the none existant western rebounds on globalisation, without at least entertaining the idea that our inability to compete is largely self inflicted.
    Who would seriously open a business in the uk?
    In theory we have a flexible labour market, but if you get wind your up for the chop, you can immediatly go on the sick, claim stress and racism, and spend the next 2 years on full pay sat at home, and thats if you lose!
    I’m aware of incident where the site manager and catering manager conspired together, walked away with tens of thousands of pounds of orders from their employer to their businesses at extremely high prices, a landrover, spares, full catering equipment for a hotel kitchen, and many thousands of pounds, possibly as high as a quarter of a million, and they won their wrongful dimissal case!

    We have a government that believes its indulging your expensive tastes by allowing you to keep half your money, and humouring you by allowing you to pick the font on your letter head, text font is set by judicial decree…..

    The cradle to the grave welfare state has reached the point of unaffordability, so at some point in the future, it will be abandoned in reality, if not in press release.

    Healthcare, Welfare and Pensions make up 25% of GDP and 50% of government spending.
    Knock them on the head, some greys will die off and some of the underclass will riot until the army shoots them back into line.
    Economic woes fly away

  4. This country is being deliberatly run down. There is a not for profit organisation that calls itself a charity called Common Purpose, and it is infiltrating all other organisations and services all over the UK, it is like a cancer, it destroys everything it infiltrates. It portays itself as a training management set up, but the reality is that it is a big spanner in the works. It is preventing people working, it is stopping people setting up useful projects that actually help other people. This organisation needs busting up immediatly, for the health of this country.

    • By now – anyone who has stopped utilising the MSM for their world knowledge will have come across common purpose. However even ‘friendly’ (to the people) MPs do not seem to take this organisation as a serious threat (I cannot understand why when the evidence is so overwhelming). But until the MSM get into the subject in a big way and a major expose begins (and the collusion of government is shown) then the people en masse will not start demanding action. The groups out there trying to oppose CP are bashing their heads against a brick wall as CP is deep within the institutions which could expose it for what it is !
      But CP is just a single tentacle of the beast which is global in nature and as mentioned above it seems to be bringing the world to the brink of a global soviet.
      Now I am not one for conspiracy theories but the last and the next crash are likely to overturn (at least) western society in a big way. I cannot believe (that with all of the knowledge and understanding out there – the forsight and exposure which was being bandied about the internet way before anything appeared on the MSM horizon) that there is not some sort of colusion by a group or even groups who wish to take the lead in the afterworld !

      Everything which has happened is pointing this way. It is all too stupid not to have been planned ! And the stupidity is ongoing even when the writing is on the wall for all too see ! The ediface is crumbling and we have an ‘elite’ trying to use ‘brain waves’ to hold it in place ! It all points somwhere – but I am not sure where because there are too many targets !

  5. John – having recently visited yourself what’s your take on the effect of the meltdown here down under? As you know the economy has been growing strongly on the back of China’s insatiable demand for increasingly expensive Australian minerals and resources.

    • Dykey
      I have never in my life encountered a property market so overvalued as that in Australia. Further, I have rarely witnessed an economy so entirely based on the need to dig into the ground for China.

      78% of Aussie exports are generic and involve no added value whatsoever.

      So in a nutshell, once China finally gets its rampant inflation under control – and realises that the West has no money to consume its crap – Australia is going to become an economic disaster…..watched over by perhaps the most plonky, irritating, inexperienced and clueless Prime Minister for many centuries.

      • Quite a lot of this I agree with John.
        Many business folk also see the urgent need for value-adding, the MO of we marketing men but lack the skills or drive to find the right formulae. Now if you and I were 30 years younger…
        Re the PM, every Aussie I’ve spoken to, bar none, finds Ms Gillard a national embarrassment who is some years behind the 8-ball in advocating the intro of a unilateral carbon tax. Australia rules yeh!?
        Mind you the weather does make up for much in one’s senior years!

  6. May-September,more imported inflation from weak sterling, commodity prices.October,traditional market attack on sterling,MPC forced to raise interest rates sharply..Further sharp falls in southern house prices and commercial property.Consumers spend less,growth stalls,tax receipts under budget.Government forced to cut welfare budget.RBS and Lloyds nationalised at nil value to shareholders.Dixons goes bust(March 2012), the Rolls Royce moment.A friendless FTSE at 4700 is the second bargain of a lifetime.

  7. No doubt we will all be relieved to know that Tim Geithner in an interview given to Bloomberg on the 26th April 2011, reaffirmed the U.S. commitment to a strong dollar and denied that the U.S. dollar was being weakened to gain an advantage over its trading partners.
    You see, we are all being hysterical and everythings ‘A-Okay’!

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