Bank and Sovereign debt commitments have emptied the growth engine’s tank.
The range and profundity of EU financial problems were revisited overnight when Moody’s slashed Spain’s rating by two notches, and downgraded the debt of Italy, Portugal, Slovakia, Slovenia, and Malta by one notch. Significantly, the credit ratings agency lowered its outlook on the United Kingdom and Austria as well. In this extended analysis, The Slog argues that the fruitless search for growth will now take over from the frantic belief in debt monetisation.
Moody’s latest EU downgrades won’t have immediate importance in the markets – although Asian shares did fall overnight. Rather, these downgrades, the upcoming FinMinCom meeting on Greek austerity in Brussels, and the Chinese banking chaos reported by The Slog yesterday all point to the global debt crisis moving almost imperceptibly from one phase to another. We have all become unhealthily eurocentric in recent months; time now – while keeping an eye on eurozone financial meltdown as it morphs into EU socio-economic disaster – to apply the other eye to a simple reality: you can’t suddenly go all Keynesian if the public coffers are empty.
One thing I find intriguing is that, while media and market opinion leaders continue to dramatise ezone events, the bulk of investors are gradually adapting to Basket Case Europe. Volumes across most markets are low at the moment, but the Chicken-Licken phase of Greece is now over. Berlin’s obvious determination to dump Athens at the first opportunity was highlighted by the volte-face of Wolfgang ‘Strangelove’ Schauble at the weekend, who – having for months predicted the end of civilisation if Greece left the euro – blithely remarked, “Well, whatever happens they will still be a European country and life will go on”. Schauble really is a piece of work.
The next phase in Europe now moves to a crisis called ClubMed, doubts about the structure of the Union as a whole, economic stagnation hitting big non-ezone member the United Kingdom, and Chinese retrenchment acting as a likely catalyst for slump.
In a piece of comical and cliched rhetoric last night, George Osborne said, “This is proof that, in the current global situation, Britain cannot waver from dealing with its debts. This is a reality check for anyone who thinks Britain can duck confronting its debts.” OK, I think we’ve got you there George, although if you want to stick in a wake-up call or three, feel free. However, as The Slog and thousands of others predicted from last Spring onwards, there simply is not a big or diversified enough UK private sector to drive an economic recovery for Britain – hence Mervyn King’s latest QE splurge, at a stroke wiping out the total net Coalition spending cuts fivefold.
But it’s the Chinese enigma that too many people are ignoring. Asian shipping shares aren’t doing well at the moment, and most of the indices measuring economic futures are at or near the red-flashing-light point. The equation here is remarkably simple: China exports to the West, West’s ability to consume spirals down the loo, China hits the ground hurting. China stops ordering raw materials, Australia goes into a rapid and deep recession, and the Sydney property bubble bursts. China cuts imports and tries to focus on the home market to take up the slack. Western exports fall further, and depression becomes slump.
Yesterday’s revelations about Chinese loans to local government poolswinners have added another dimension to Beijing’s problems. I was surprised the piece here didn’t get more hits – the scandal does, after all, involve a likely Beijing write-off of a sum totalling nearly three times the size of the US bank bailout of 2008. It doesn’t have any of the potential for contagion, but let’s get real here: we have a stop-start gerontocracy in China grappling to control private property inflation, chronic housing shortgages, huge wealth imbalances, overspent infrastructure budgets, and most of its trade customers going bankrupt. The likelihood that China will soon shrink as an outlet for Western consumer goods has now become a near-certainty, but the coverage given to this development was minimal. Anyway, you read it here first.
In the more immediate term, Brussels, Berlin and London are all about to be found out by the lack of G-forces: there simply isn’t any growth potential. Mario Monti has had an immediate, positive influence on the Italian situation, but as yet another Goldman veteran he knows perfectly well that the Wile E Coyote mid-air realisation moment is upon us. For the last three weeks he has spoken in public of only one theme: economic stimulation.
Just as Greece now finds itself blamed for an economic performance made worse by the incompetent Troika, Italy’s parlous output figures will soon come to light. Spain’s property weaknesses remain largely unsolved, and Portugal is barely functioning as an economy. We will reach a stage in a month or so where the next German to say ‘austerity’ will be shouted down. The mood will change – indeed, it already is shifting. A source in Dublin told me yesterday afternoon that – in the light of Athens developments – the Irish Government is now “confident” of negotiating some form of debt forgiveness.
This would be fair to my mind: more than any other EU peripheral, Ireland has taken the hit on the chin, wafted a towel at the concussion, and gone out fighting for another round. The problem remains, however, that bazookas exist only for borrowing….and even then, largely in the tortured minds of Tim Geithner and Christine Lagarde. The cupboard has been almost emptied by the credit fiasco: either the private sector takes a huge hit from here on, or the consequences will be even more dire. I first used the phrase debt forgiveness here in May 2010: I’m still at it. Yes, yes – I know that this will have awful knock-on effects for every banking and insurance institution on the planet. But zero economic income simply doubling the debt will be far, far worse: most sovereign debt is notional, but goods exchanged for currency aren’t.
The UK is busily emptying its cupboard of the bit that’s left. The new QE round from Mervyn King marks the point at which I finally part company with Merv. I realise that I’ve just finished saying we need to ‘create’ some money for economic stimulation, but you can’t stimulate a fantasy. Well, you can – by taking drugs – but we’ve had enough fantasies and silly wing-and-prayer stuff like that already from the amateurs in Camerlot. Dave might get the odd inspired vision from a line now and then, but the next morning will only find him ‘suffering with a cold’.
This is indeed what makes Britain a special case – as in a special Basket Case – among the EU’s larger players: the French have their farming to fall back on, and the Germans their engineering. We have a bunch of lunatics buying and selling worthless shreds of paper. So while the EU lacks the money for economic ignition, the UK lacks a motor as well as the money. One shouldn’t ridicule the Sarkozy jibe just because it came from an intellectual Anglophobic ant: technically, he’s right. Only 13% of the UK economy does something other than provide retail or financial services.
The West is about to face up to mercantile greed-capitalism’s fatal flaw: it can never resist kicking the investment-can down the road in favour of instant bonus gratification. Western sovereign democracies are about to face up to supranational and meganational government’s fatal flaw: they can never resist kicking the diversification-to-debt can down the road in favour of votes, and another term in power.
I do have lots of answers to this dilemma: more small and community capitalism, more national self-sufficiency, more businesses modelled mutually, more emphasis on tax as a behaviour-changer rather than an income drain, smaller national Government, dumping globalism and, above all, much less notional money swimming about busily infecting the real stuff.
All that said, however, two answers present themselves not as bollocks, but rather, as the dog’s bollocks: in the immediate term, debt forgiveness. And in the medium term, the removal of all monied, commercial and financial lobbying interests from Western politics.
The debt forgiveness thing is based on logical common sense. As I’ve outlined above, business isn’t going to get back on its feet without investment in new ideas and processes, and giving such manufacturing is there is the confidence to tool up and employ new staff. The only way to create that money without printing it is to forgive debt. (In the longer term, reducing dependence upon the remote shareholder multinational model of financing capital would also be a major leap forward – as would [especially in the UK] a much more intensive focus on better farming producing a reduced need for food imports. Leaving the EU, by the way, I take as a given).
My ‘take money out of politics’ point is worth a lengthy tome in its own right. With luck, it will come as a side-effect of the phase after Crash 2. With bad luck, we will lurch back into Leftist state-controlled fluffiness. Berlin and Brussels are, between them, ensuring that the chances of that second option will become much greater. This – more than any anti-German bigotry – is the reason why The Slog has, in recent weeks, become far more single-minded in saying that the Merkelian Juggernaut must be stopped by any and all means. With every tree crushed under its caterpillar tread, it is making things infinitely worse than they need be.
If Sloggers don’t mind, I’m going to ignore any and all comment threads saying ‘you will never take money out of politics’. Two Bills to ban direct lobbying and fund all political Parties through the State could achieve much of it in one afternoon. But apart from that, saying it’s impossible to do is kind of pointless really. We either want a better econo-political model or we don’t.
Thanks for getting to the end of this piece – apologies for the length of it. Have a good day.
The Slog 