23 June 2009

Wandering from a dead past toward an unknown future

I beleive real change is afoot. The debt bubble in the final analysis is the endpoint of a money system which mispriced capital too cheap and therefore pumped up asset prices, then monitised to pay for lots of fossil fuels and consumption. With the illusions on which it was based shattered this credit creation system is completely busted. The centrality of Wall Street and the City has hit the brick wall of investor sentiment, physics (obsolete production paradigms) and politics and in the medium term will be disintermediated by a long credit winter. The baton has been passed to almost invisible organisms with snug burrows and good prospects that are out of sight to most.

The bankers who created a new alliance between private bankers and public government, the government bond enabled state ambition, used firstly to finance mercenary armies to pillage the competitors of Italian City States. Those bankers would have no difficulty recognising that a nation with the power to make its bonds the universal measure of value would ride its advantages to vast wealth, geopolitical clout and military power.

In the same way that we dimly recognise that much of what passed for financial modernity was the last gasps of that medieval order, they knew that secret interventions in the public market for such state debt can maintain the facade of solvency that covers the flight of insiders..

The architects of the old order of giant financial reptiles were also fully invested, naturally enough, in political power. Hence the bailouts to date, but the enormous cost has only bought a little time and in the end no tree grows to the sky and politics always follows the money. Money, barring a final hyperinflationary death rattle will be seen to now flow from first movers in a new technological, economic and social order.

The real deal ahead, imo, is all about conservation and efficiency and new production technologies. Its about a return to the classic human virtues and a recovery from a mania that was "all quickness but no movement" fueled by cheap fossil fuel energy. Only after rest and rehab will the West finally muster the sacrifice and effort required to build a cleaner, greener and clearly sustainable for the long haul future.

Popular culture will track the declining prestige of bankers and bondholders relative to innovators in manufacturing and technology and a new respect for greenies, farmers, scientists, teachers and librarians will slowly emerge.

So what we are in is that difficult period when those who will benefit from the great changes ahead lack power while those who will lose by them are well established with the means to defend the status quo.

We wander a no-mans land where reality is only slowly dawning where unless your absolutely sure about what your doing a burrow is the best bet.

The consensus view, far from grappling with the technical and political difficulties of implementing the required policy response, has failed even to admit the extent of the problem. Yet such an admission is a prerequisite, the first step in fact, of doing what needs to be done.

For almost two years now, our leaders have been in denial, burying the details and delaying the really tough decisions. In recent weeks, though, something has changed.

For the first time since the credit crunch hit the headlines in August 2007, reality is punching through. Powerful people are breaking ranks and saying what needs to be said. Pretty soon we may even begin tackling the root causes of this debacle by facing down the vested interests and making the changes necessary to rescue the Western world from years of economic stagnation.

Earlier this month, Angela Merkel, the redoubtable German Chancellor, took a stand and appealed for "a return to policies of reason" – calling time on "quantitative easing", the deeply misguided policy that has seen Western central banks double the size of their balance sheets to buy government debt.

QE was always a ruse to recapitalise insolvent banks by the back door, so their powerful executives could avoid admitting previous mistakes. Yet it has shattered the world's faith in the West's policy-making competence. It has destroyed any authority we had to tell economies elsewhere what to do.

QE will result in high inflation – in turn, destroying investment and jobs. And it will mean that, for years to come, Western taxpayers pay higher interest charges to service our government's debts.

Almost alone among the ranks of the seriously powerful speaking sense, Merkel was last week joined by Mervyn King. At the annual Mansion House dinner, the Bank of England Governor called for Gordon's Brown's disastrous "tripartite" reforms to be scrapped, returning banking supervision to Threadneedle Street.

That has to be right. UK banks have been able to act so irresponsibly because the authority to monitor them was split between the Bank and the FSA. In fact, Brown was so addicted to the political feel-good factor resulting from ever higher leverage that his system was explicitly designed to allow responsibility for reining in the banks to fall between two stools.

King also stated "it is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee".

These words echoed around the world. The Governor is calling for a re-instatement of the "Glass-Steagall" firewall – the removal of which allowed investment banks to merge with commercial banks. That meant taxpayer-backed deposits could be used by bonus-fuelled traders to make high-risk bets – in the knowledge the state would have to fund a bail-out given that ordinary voters deposits were involved.

By calling for a new "Glass-Steagall", King is taking on Wall Street and the City – among the world's most powerful vested interests.

Yet, politicians need to realise it's precisely because this safeguard was removed, and the "universal banks" became so big, that what started as a banking crisis has become a fiscal crisis – a crisis so severe that some of the world's leading nations could default and, at the very least, several generations of Western taxpayers will be saddled with the bill.

Other harsh realities are now also coming to the fore. New figures confirmed UK government debt is rising quicker than at any time in history – not least due to the bank bail-outs. As the recession hits tax revenues, May saw the biggest surge in monthly public sector borrowing since records began.

In this context, the Tories are now finally allowing themselves to face down Brown and his economically-literate allies – by admitting spending cuts are necessary. How ridiculous does Brown sound when he contrasts "Labour investment with Tory cuts"?

Then there is "deflation" – in my view, the "biggest lie" of all. In May, CPI inflation remained at 2.2pc – above the Bank of England's target. Were it not for the government's temporary VAT cut, the CPI would be 3.4pc – with the Bank have to write yet another public letter explaining why it's so high. We're a million miles from deflation.

As I've often said, the "danger of deflation" was always a myth – conjured up to give Western governments an alibi to pursue wildly expansionary fiscal and monetary policy and perpetuated by the vested interests benefiting from such largesse.

If we're to emerge from this crisis, and avoid similar future disasters, powerful figures now need to recognise and expose such inconvenient truths.

Alarm bells on public sector pensions

Some state employees work hard – and we're lucky to have them. But, in general, public-sector workers enjoy shorter hours, longer holidays, better job security and higher wages than their private-sector counterparts.

Yet 90pc of public-sector workers also have gold-plated final-salary pensions, compared to only 10pc in the private sector. They retire earlier too.

Our ageing society means most of us will reach for our slippers later and on lower pensions than previously thought. But state workers remain immune to economic reality – at everyone else's expense.

The costs of this injustice are vast. Between 2001 and 2008, our public sector pension liability officially grew 110pc to £794bn. A new Policy Exchange report by Neil Record puts the true figure at a staggering £1,104bn.

This massive debt doesn't appear on the Government's balance sheet. Yet each year taxpayers spend more on public sector pensions than defence. By 2040, the annual bill will approach what we spend on the NHS.

A former Bank of England economist, Record has a deserved reputation as an astute, non-partisan fiscal expert. His report's advisory committee includes some of the UK's top actuaries and the former chairman of the Inland Revenue.

The Tory front-bench needs to act on this study. Spin is not enough. The ratings agencies are watching – and public-sector pensions are high on their list of concerns.

BRICs at the top table

Last week, leaders of four of the world's largest economies – Brazil, Russia, India and China – met in Yekaterinburg, Russia. Known as the BRICs, these vibrant nations now account for almost 20pc of global GDP – the same as the United States.

Even this startling figure understates the importance of the BRICs, and the emerging markets (EMs) more generally. Together, they now drive 42pc of global GDP – and rising. That outstrips the US and EU combined.

Over the next few years, as the Western world stagnates, the EMs – with their low debts and highly productive workforces – will keep growing. Global investors largely agree. That's one reason the world's top 10 performing share indices so far in 2009 are all EMs.

Crucially, EMs now boast two-thirds of the world's foreign exchange reserves. The BRICs control the lion's share of that haul.

For the most part, the Western media has dismissed this first BRIC summit as "unimportant". That's partly because the G7 nations weren't invited. The reality is the BRICs' emergence on the world stage is transforming global commerce – and politics too.

These countries are crucial Western creditors. Insolvency looms, unless they keep funding our spiralling government debts. Western leaders need to grow up and realise the world has changed. If we don't accept the emerging giants at the top table, they'll create their own – resulting in a less prosperous, more dangerous world.

It's refreshing to see that you are one of the few writers in the mainstream press who is constantly reminding us of the forthcoming oil crises that the government doesn't want to talk about probably because they think that we're depressed enough as it is.

You may also wish to look into what the Chinese are doing to monopolise RARE EARTH materials e.g. Neodymium is essential for producing the super-magnets inside wind turbines and hybrid cars. RARE EARTH elements are also vital for producing batteries and other such requirements in our so-called "green future". Transitioning into this future is by no means going to be as seamless and painless as our short-sighted politicians make out. The Chinese are already planning their green and fossil fuel energy requirements into the 22nd century. They have already got their teeth into Brazil and the deep offshore Petrobras project. They are also starting to monopolise on RARE EARTHS. It doesn't look like there will sufficient resources left over for the economies of the western hemisphere to carry-on-business-as usual. Check out RARE EARTHS.
Mark Pearce
on June 22, 2009
at 06:01 PM
Report this comment

We're currently in a paradigm red shift. Deflation and inflation are two black holes that are consuming each other. The "negative feedback loop" is still running full steam and still requires inflation as a component. The only way deflation "wins in the end" is by getting pushed over the cliff by inflation disguised in some form or another (debt, commodities and equities). Debt is the worst. The offspring of all the bubbles have come home to roost. Until the high cost of debt disappears to the tune of tens of trillions of dollars, it remains highly inflationary in its current state. Furthermore, debt begets debt because the marginal productivity of debt turned negative throughout the creation of all the fiat driven bubbles, so the debt will only become more expensive - THAT is inflationary and will continue to eat away at the operating margins of individuals, businesses, and governments.

If only Ambrose Evans Pritchard and Edmund Conway in the DT had your sense Liam.
Deflation was a lie sold to the masses with a concerted media campaign using amongst others Conway and Pritchard Evans in the DT. Its prime purpose being to prop up inflated assets (houses) and prevent the necessary correction from taking place. The 'elite' who run the western banking system have no intention of allowing a needed correction to take place. They would rather debase the currency and prop up assets and eventually return to business as usual even at the risk of hyperinflation and anarchy.

No comments: