Fiscal ruin of the Western world beckons
http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...
Fiscal ruin of the Western world beckons
For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.
By Ambrose Evans-Pritchard
Published: 5:40PM BST 18 Jul 2009
Comments 280 | Comment on this article
Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.
A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.
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Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.
"Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest."
No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.
As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.
"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.
France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.
There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.
Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.
Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary "shock and awe" through quantitative easing.
The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".
Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
The Fed's doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.
It is worse than anyone can imagine!
Here is a narrative one month ago by Martin Weiss describing the failure of the actions by the Federal Reserve to inflate prices by inflating money supply.
http://www.moneyandmarkets.com/new-hard-evidence-of-continui...
Here are some simple fundamentals behind the financial crisis (my own thoughts, not Weiss's):
There is a 1 to 1 correlation between oil production and GDP (gross domestic product). Oil production hit a peak in July of 2008 and is off about 4% as of the end of April, 2009, which translates to about a 5% annual rate of decline. Old wells are still being pumped, but exploration and development activity is at a relative standstill. Taking all known major fields coming on stream and the know depletion rates of existing fields, production should be down another 10% by the end of 2012 elections and down yet another 15% by the 2016 elections, if there are even 2016 elections.
Unemployment at the faked rate is now admitted to be about 10% so by 2012 it should be about 20% and by 2016 it should be 35%, but you can add about 10% points to each of those numbers to get the real rates.
This is an economic contraction without end, simply because the industrial age is dependent on oil, and its rate of production is now in terminal decline. And the worst part is that before the industrial age really began expanding at full tilt back around 1776, the world population was 3/4 of a billion people. On the back of the production of the industrial age the world population expanded to 6.7 billion. Think about that; all of human history to get up to 3/4 of a billion and then an explosion in just 233 years or so; talk about a bubble.
Of course the fraudulent debt based monetary system was an accident waiting to happen, which compounds the problem. Debt is based on an expanding economy for the ability to repay out of future expanded production and earnings. When the economy enters terminal contraction, debt becomes a crushing burden which cannot be repaid. All of what is currently produced is needed just to keep the teeming 6.7 billion world population alive. There is little or no extra to invest in more oil production or in alternatives, which alternatives don't work anyway, and which alternatives certainly don't hold a candle to the energy in oil.
The private economy is dead, and the only part in the US that is expanding is government, which produces nothing but theft and distortions in economic relationships.
We are on a collision course with massive civil unrest and probably civil war, as those in power seek to remain in power, and the rest of us find life intolerable as a result of unemployment, starvation, homelessness, and the increased government repression that comes with an attempt to hold on to power in a collapsing system.
Contrary to popular "hyperinflation" belief, the attempt at monetary expansion is failing. It was last September (2008) when the FED put the pedal to the metal by doubling the monetary base (the reserves against which banks could expand the money supply) and the result was small by comparison to the reserve increase. M2 money supply had been running at a 6% rate of increase before the attempt to hyper-expand it, and the response was a jump to about 10%. But over the past several months the rate has held at 10% year over year. Up until September, those prior year numbers were not inflated beyond what was normal, but this September the prior number will have inflation in it, and so when the current September number is compared to the prior September number, the rate of change will be less than 10%. It will probably fall down to 6% and as the months progress will likely fall down to closer to 2%. This is hardly a runaway inflation of M2 money supply. The same story applies to M1 except that M1 was jumped up to 15% temporarily and the rate of change for it will also return to normal or subnormal numbers just like M2.
Look at this chart for M3, particularly the rate of change numbers, and tell me if you think we are facing inflation or deflationary debt collapse.
http://www.nowandfutures.com/key_stats.html
"The deepest sin against the human mind is to believe things without evidence." Thomas H. Huxley
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And then you have the new Immigration Bill
If things weren't bad enough they are now working on a new Immigration Bill that will allow illegal immigrants to more access to our health care adding more of a burden to what we already have. Lou Dobbs did a piece on the new bill. Check this out!!! http://www.youtube.com/watch?v=6N-miI7k23E
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for a healthy exchange of opinions...
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