The Great Recession

October 17 2013

2013-10-15T12:46:00.001+11:00

This is the date of the potential U.S. default on its sovereign debt. If it occurs it will be blamed on a small section of the US Congress within the Republican Party referred to as the "Tea Party". It would be a catastrophe for the banking sector, the global financial system, and the indebted everywhere. Interest rates would likely rise dramatically in the space of a week. People exposed to large mortgages could be forced out of their homes in many cases. A social divide would develop between the cashed up and the indebted. Entire sectors of the banking industry could disappear. Oddly enough it could, in the medium term, turn out well for the U.S. It could prevent further indebtedness, lower the US dollar, force the US to rebuild its manufacturing base and restore its competitiveness. Whilst definately not in my personal interest, I realise in the medium term it could work out very well for the U.S. I suspect that the short term cost will be so high that any political party that did this to their own nation would end up paying a heavy price for at least a generation. However the Tea Party are a protest movement and not a political movement, as such, it is well within their mental space to embrace actions that would take the U.S. to a default. If it happens I suspect this Great Recession will well and truly feel like a Depression. It is now possible that U.S. Congressmen will do what the U.S. creditors are not prepared to do, call the bluff on the American Insolvency.

A long time between posts! I will put it down to having a new born. Many people are legitimately asking where are we in the economic cycle. It seems to me that we are now finally on the verge of increasing inflation and interest rates. Ben Bernanke's decision to continue quantitative easing at its current rate will begin to leak into the real economy with concomitant increases in inflation and interest rates. The link for this post is an article reflecting on the views of the Governor of the Reserve Bank of India, who clearly is not a fan of the fantasy economics which seem to dominate the thinking of leaders over the last generation.

Horses to Water

2012-10-25T14:27:00.001+11:00

http://www.businessspectator.com.au/bs.nsf/Article/currency-wars-australian-dollar-us-dollar-euro-rom-pd20121025-ZDQZ6?OpenDocument&src=sph

Many many posts ago I discussed the looming currency wars. We are now there; as competitive devaluations start to take hold and fiat money as a system comes under sustained attack. There is now a concerted effort across the major developed economies to inflate the global economy through sustaining, a now apparently intentional monetary expansion. I say intentional because that is exactly what got us into this place in preceding two decades. Instead of cutting a zero of the global balance sheet there now seems a considered desire to add another one. Effectively this strategy now means a shift in power from savers in favour of debtors; sovereign, corporate, and individual.

Maintaining high levels of inflation for even a period of a few years will greatly reduce the debt burden on debtors sovereign or otherwise. It sounds like a plan, and indeed is until you think about the end game. It may look something like:

A breakdown in global trade with significant consequences for emergent economies.
The politicisation of trade into alliance factions.
Undermining of property rights driven by debasement of fiat currency systems.
Re-emergence and re-entrenchment of more authoritarian systems of government.
Armed conflict as a tool of government policy for managing dissent.

If history does repeat itself we may see the re-emergence of widespread localised conflicts especially for natural resources in the absence of effective world trade. I think it is unlikely to be a global war per se but a series of regional conflicts. Possible locations:

South China Sea - China, Japan, Vietnam, The Philippines, and the US.
Siberia - China and Russia.
Mongolia - China and Russia.

The middle east is now far more unstable that it was before the disastrous Arab Spring which replaced totalitarian but stable secular governments with whatever may replace them; which will be anything but democracies. I suspect that as much as it may try to avoid it Turkey will have a critical role as a focus point of conflict here.

Well a lot of geo-political speculation today. I will go pack the crystal ball back up!

1934

2012-06-06T13:25:00.001+10:00

http://www.businessspectator.com.au/bs.nsf/Article/Panic-has-become-all-too-rational-pd20120606-UZ2P6?OpenDocument&src=sph

Please find above a link to Martin Wolf's article covered in Business Spectator.

In this article Martin makes the following statement:

"Before now, I had never really understood how the 1930s could happen. Now I do."

This blog in heading towards its eigth year and I suppose I should comment on this statement. Martin seems at a loss to explain how poor decision making is leading inexorably towards disaster. Unfortunately, as this blog has long maintained, this disaster started in the 1990's just as the previous one started in the 1920's. The irresponsible expansion of money supply led to this situation. This increase in money supply led to an expansion in credit. The expansion in credit led to inflation, not in CPI's (largely) but in asset prices, like Spanish real estate or US shares. As the asset values increased so did the apparent collateral to support the underlying debt. In many cases this increase in asset values was realised as income and cashflow funded by the debt that was borrowed against the asset value. This occured at many levels. Individuals borrowing against their houses and spending the surplus from thier refinanced mortgages, and investment banks refinancing infrastructure and property and distributing the refinancing gain to equity investors.

Now the magic roundabout has stopped. Now we all get off and now we begin to understand where we are:

Unemployement in the teens and twenties.
Wholesale collapse in asset values.
Both governments and systems of government collapse.
The rise of totalitarian states to replace weak democracies as people seek to blame anyone but themselves. Greece may be the first.

The cycle is repeating itself. Welcome to 1934.

Antigone and the Decline of the West

2012-05-24T10:02:00.000+10:00

If Sophocles was alive today would he write of Antigone's need to bury the Euro. I cannot be sure of that, but indeed, the Euro does need to be buried. The Euro has been a stage curtain hiding the play beneath. The play that had been going on beneath that curtain was a sad tale of nation after nation borrowing against the prosperity and competitiveness of other nations without a clear understanding on the consequences, or at worst, a reckless indifference to the inevitable reckoning. Full and fair disclose here....I want this reckoning. I want to see an accountable and well governed Europe and this is far from what is unfolding. Greece is ungovernable. The new French government seems set on agressively moving Europe into third world status.

Lets be abundantly clear. There is NO growth option. There is austerity and there is hyperinflation. These are your two choices. I only hope that Germany with its disasterous experiences in the 1920's understands the least offensive option here. In fact, I would like to see nothing less that Germany withdrawing from the Euro as a clear message to those in Europe "living the dream" that the hyperinflation and currency debasement party is not one that plan to attend.

It now begins to appear that the Great Recession is something more that just an economic crisis like the Great Depression. It is far more dire because it is not just parts of Europe but the United States as well; living beyond their means without the political will for accountability. Therefore I must conclude that the both the economic, moral, and cultural strength, of the West has likely commenced a process of protracted crisis and extended decline.

Sovereign

2012-01-12T13:31:00.005+11:00

"Sovereign" is a word you can expect to hear mentioned a lot in 2012 usually followed immediately by "risk" or "default".

We spent 2011 dodging and delaying what appeared to imminent defaults in Europe. Rather than follow the legitimate approach of recognising government insolvencies and the unsustainability of the Euro, European leaders continued to pursue what they perceived as the more morally praise worthly approach of continued bailouts and the potential for greater European fiscal union. This writer however believes, and has always argued that the national solvency issues should be recognised, accepted, and resolved in order to move forward. The "Club Med" nations of the Euro that are hopelessly insolvent should be cut lose fo the Euro and allowed to reorganise their debts and currencies on their own account.

The massive writedowns that need to occur in European banks should be allowed to proceed and if some disappear all the better. Those who have pursued prudent risk and lending policies (if any) will be rewarded; the only proviso I have is that depositors should be guaranteed by the State.

Pressure on government bond pricing has been significant over 2011. Perhaps 2012 is the year when interest rates across the developed finally start to realistically factor in the significant price of sovereign risk.

Whatever happens in Europe will seem like sideshow compared to the economic consequences of the Chinese economy finally discovering the theory of gravity. That remains a dice roll......

The Dismal Science

2011-10-21T15:55:00.002+11:00

It is an interesting thing; to read about The Great Recession, now that we are actually in the middle of it. I cannot tell where the market will move tomorrow or whether Spain will default on its sovereign debt in 2 years. What I can tell you, and what I think any decent economist should be able to tell you in where we are in the "supercycle".

We can probably all agree on a few things:

There was a boom fuelled by cheap debt leading to irresponsible investments and risk taking

There was a credit crisis induced by defaults on securitised mortgages (read the first post!)

Irresponsible monetary policy with overally low interest rates added fuel to this fire, accerating the boom, and exascerbating the bust

We are in the bust - this is a severe prolonged global recession

So, if there is broad agreement on what caused the recession we are currently in, it seems mind boggling that no one sees ,with equally clarity, how this should be resolved:

Debt caused the boom - deleveraging will correct it, by default or austerity

Irresponsible lending practices led to excessive risk taking - reform and regulating the banking industry is required to see that this doesn't happen again (at least until Alan Greenspan II repeals the Glass Steagall Act II in the late 2060's)

Economic science (a stretch of concept), indeed all social sciences need to incorporate generational theory into their models. As Messrs Howe and Strauss have proven, history does indeed repeat itself.

What we call "The Great Recession", history may well call "The Second Great Depression" just as "The Great War" became "World War I".

Let's just hope history doesn't repeat in every way.

Two Waves Collide

2011-07-19T12:17:00.002+10:00

One of the persistent features of the Great Recession is that we have not yet undertaken the necessary surgery to correct the underlying problem of how we reached here – chronic over indebtedness amongst developed countries. The deleveraging that should have occurred from 2008 has been continuously delayed.

In some countries, such as Greece, the situation is so dire and the country so hopelessly insolvent that default is the only option. It has now become blatantly clear that whilst monetary union was an idea that arose with the best intentions; the Euro has completely failed as an integrated currency for Europe. Perhaps there is a future for the Euro but amongst a smaller group of nations that can jointly sustain a relatively sound fiscal policy with broadly economic health. Not only is the default of a number of European countries inevitable it is necessary and desirable including all the concomitant ramifications of bank collapses for those that have not practiced risk adverse policies. Only when fictitious global capital has been erased can we start to rebuild the global economy on a sound basis. So as Europe continues its slow grind towards the end of the Euro the United States is playing its own version of Russian roulette with its debt ceiling. Again, the issue is not as simple as it appears. Yes the US should not continue to raise its debt ceiling, and yes and measures to this effect should have commenced a long time ago. However that fantasy argument that you can cut spending alone without addressing taxation suggests the naivety of the political establishment in the United States (read Tea Party).

If these two events occur simultaneously the impact on the global economy is likely to be extremely severe. It won’t look like a day at the beach and if it did, I wouldn’t go swimming in it.

(No link to a specific article today as this post has been informed by several.)

Interest Rates headed North

2011-05-17T12:25:00.002+10:00

Please explore the link above from Karen Maley's article in Business Spectator. The article refers to Dominque Strauss-Khan adventures in a US hotel and its potential impact on Greece. In particular the arrest of DSK, may impair any (misguided) support for further Greek bailouts and precipitae a Greek debt restructure of default. The final line is the takeout and a heads up to any reader...

If investors ultimately lose confidence, we could be in for a complete re-rating of risk around the world, which would spark a huge sell-off in markets.

The huge sell off in equities would be accompanied by a rapid rise in global interest rates, leading to further defaults and plummeting asset prices globally.

US Debt Default Enters Mainstream Media

2011-04-12T18:03:00.003+10:00

It seems that the unthinkable and yet inevitable is now finding its way into mainstream press - see the link above.

If default by stealth through continued debt monitisation, inflation, and dollar depreciation fails, the US may be forced into a de jure default on its debts. The constant bailouts of the European defaulters have simply delayed the inevitable. I greatly doubt for example, Greece's ability to reform its economy and service its debts post-bailout. The cleanest and less damaging approach would have been to let Greece default, withdraw from the Euro, and have economic restructuring forced upon it.

Political debate in the United States, to the extent it legitimately exists (which I question) alternates between two partisan extremes. Only the left are the quacks who apparently don't realise or care that there is a debt problem and would happily let the US spend itself into default. On the right are another bunch of quacks who apparently realise the existence of a debt problem, but in reality are just as predisposed to let the US default by cutting spending AND taxes simultaneously.

With this level of puerile discourse in the United States void of any mainstream meaningful economic debate the US truly appears in a period of extended decline, first economically and then shortly thereafter socially. The political aspect of its decline commenced decades ago with the counter-intellectualism of the conservative movement.

Checkmate

2011-02-16T14:43:00.004+11:00

Please follow the link to Karen Maley's article in Business Spectator today. This is the most articulate and focussed article on the global economy put to press for sometime. Particularly, the conclusion, that we have simply prolonged the hangover from the GFC, rather than have begun to deleverage and rebuild. By transferring private debt to public debt we have greatly exascerbated the problem and created the real possibility of a string of sovereign defaults over the next decade.

Unfortunately it remains my firm view that we are far from recovery or any semblance of the pre-GFC "status quo".

There remains a severe economic reckoning still to unfold.

Consequences of mis-diagnosis

2011-02-10T17:20:00.003+11:00

Ignoring how low rates created the crisis is like blaming the crash of the Hindenburg on bad weather, poor piloting, lazy ground crews, and overly emotional broadcast journalists, while ignoring the 200,000 cubic meters of flammable hydrogen gas that the airship held in its structure.

Please find the link above to Peter Schiff at his best. Clear evidence again that the decision makers in the U.S. remain oblivious to the courses of the Great Recession and will continue to exascerbate rather than treat the problem.

Given the vast monetisation of the US dollar currently underway the tide has definitely gone out of that inflation tsunami.

The Fourteen Speed Economy

2010-12-01T14:05:00.005+11:00

In recent press, over the last year, Australia was described as being a "two-speed economy". The bouyant mining driven economies of Western Australia and Queensland contrasted against the more subdued, if not stagnant, economies of the eastern seaboard states. At the time is was speculated that the Reserve Bank's monetary policy was struggling to contain these two diverging economic zones. What we are seeing in Europe at the moment is in effect the "fourteen speed" economy, and it may well tear the Euro apart.

Please find attached a link to Business Spectator with an article from Martin Wolf at the Financial Times. Here Martin provides a pre-emptory autopsy of the Euro. The Euro was always an ambitous idea. Indeed it may have worked where it formed the common currency for a number of like economies operating in broad concert with each other. However as Martin outlines, the Euro has in effect contributed to, if not facilitated, many of the economic adjustments that are taking place in the PIIGS economies at the moment. These weaker member economies of the Euro need to devalue their currencies, increase there competitiveness and restart their economies. This clear is something they cannot do whilst they remain members of the Euro.

Stapling the struggling economies of the PIIGS to the economic powerhouses of Western Europe via the Euro has now been seen to be a misconceived idea. The euro may survive, or survive is a different form, perhaps within a smaller better vetted club. Then again, this decade may also see the return of some familar names, drachma, franc, and deutsche mark.

Currency Wars

2010-09-28T11:01:00.002+10:00

This blog first alluded to the coming currency wars in 2004. Global economies are actively competing to debase their currencies in an attempt to maintain their export competitiveness. As national treasuries open up their printing presses the expansion in the money supply will have a number of effects. Initially it will cause their currencies to fall relative to stronger economies. In Australia the Aussie dollar is now on a ballistic trajectory that will bring it far beyond parity with the USD.

Latter consequences will be even more severe.

Gold is on an even more pronouced trajectory than the AUD and likely to go into orbit as fiat money is aggressively debased. No doubt in the end it will morph from a legitimate store of wealth and hedge against inflation into a bubble in its own right. This seems inevitable in a civilisation that is addicted to non-productive wealth. However, it is still a very long way from bubble territory yet.

Click on the link that will take you to the article from The Globe and Mail quoted the Brazilian Finance Minister, Guido Mantega.

Tail of the Dragon

2010-09-08T12:32:00.005+10:00

The global economy remains firmly on track for a continued deepening of the Great Recession into a self confessed depression. In Europe the PIIGS seem content to splutter along with the heavily indebted economies on a ever more tenuous lifeline from the European Central bank and faint hopes of support from Germany.

The United States is an economic disaster zone with real unemployment approaching 20%, several states on the verge of tangible insolvency, and the US at a Federal level in a position of hopeless indebtedness and continuing to support the mercantilist policies of China through protracted inaction.

Australia remains in a state of prosperity apparently unparalled in western economies. A factor I confess to never anticipating. However I suspect that this merely conceals the extent of our future fall. We remain hitched to the tail of the dragon and our economic fate linked to our Chinese mineral exports (an economy still to pop its numerous bubbles).

The next stage of the slow motion train wreck we refer to as the global economy remains most likely a sovereign debt default leading to the repricing of sovereign risk and the concommitant currency adjustments that will in evitably follow.

Please click on the link above to Karen Maley's sombre article from today's Business Spectator on European debt and rising service costs.

Savings Rates

2010-08-19T14:02:00.002+10:00

In a world of capital shortage, the countries where the shortage is least acute will do best. France, Germany and Italy, with double-digit savings rates, will outperform Britain, the United States, Canada and Australia, whose savings rates have consistently lagged.

Finally an article worth posting on this blog! An astute assessment of where we have come from, where we are heading, and why. I encourage you to click on the link above and read the article by Martin Hutchinson.

Frypan to Fire

2010-06-04T12:09:00.002+10:00

An IMF sponsored period of 15 per cent unemployment and 15 per cent inflation would allow Europe to survive intact and make the adjustments necessary to combine the spendthrift economies with the thrifty in a way that genuinely works. It would be a protracted but endurable adjustment period but it would not be a catastrophe.

Please click on the link above to a excellent article in today's Business Spectator from Mark Carnegie. I would content that Mark's best choice "Plan C" will end up being more of a global choice than one confined merely to Europe. Unsustainable global indebtedness is only now finally being brought to account. The flight to quality to the US dollar that we have recently seen is truly a frypan to fire scenario.

Global interest rates will soon rise and this will be a phenomenon largely outside the control of individiual reserve banks.

Five years of 15% inflation would indeed be the best outcome for debtor nations by facilitating a structural default on their debts. The concept of sovereign risk has even begun to be comprehended by global markets.

Three Gets You Two

2010-06-01T14:46:00.003+10:00

The link above takes you to a great article from Pimco's Bill Gross. In its core this article takes us to the reason why we are not at the end of the Great Recession. The global deleveraging has not yet begun. Rather than retire and reduce their debt burdens governments around the world have started the morning after the GFC hangover with a couple of Bloody Mary(s).

How governments approach deleveraging remains to be seen. In the context of the current level of global indebtedness in many economies such as Greece, austerity measures and rebalancing budget may simply not even be practical let alone politically viable. That leaves the propects of default of which I believe there are at least three distinct kinds (possibly more):

1. Repudiation - "I can't repay and even if I could I'm not going to try"
2. Negotiation - "I can't repay but I would like to if I could. How about you take 50 cents in the dollar and we call it quits"
3. Stealflation - "Actually I will pay you all the money I owe no problems.... I am however going to run inflation at 15% for 5 years and the $1.00 I owed you is now $0.12 real"

My money is still on the smart debtor governments running inflation at 15% for five years, or something similar.

I suspect over the next 5 years we will see all three solutions.

Greenspan and the Next Five Years

2010-04-08T09:08:00.003+10:00

It has been a while between posts but today's has a worthy link.

Please see the link above to the article from Bloomberg which was reposted in today's Australian Financial Review. The article discusses Dr. Greenspan's 'legac'y and his view that the consequences of unregulated lending and expansive asset bubbles could not be forseen. Furthermore Dr. Greenspan a.k.a. the Maestro, a.k.a. Easy Al argues that lax monetary policy did not contribute to The Great Recession. Sigh. Fortunately it is no longer the sole duty of this blogger to defend a rational interpretation of economic management. The denial of responsibility for the worst economic mismanagement in recent history is perhaps predictable, but it is also now futile.

Where we will need magic in the next fives years is in extricating ourselves from the "monetary accomodation" and concommitant indebtedness that is characteristic of so many major global economies. There has been much discussion recently of Greece's precarious economic position and that of its fellow "PIGS": Portugal, Ireland, and Spain. Much larger economies are also mired in severe indebtedness such as Great Britain, Japan, and the United States. There appears at this stage of The Great Recession only one path open to work through this situation. Namely, that is to run inflation in the mid- to high- teens for a period of years to devalue the level of global indebtedness and effectively default on their obligations.

Any talk of "green shoots" or recovery in this environment is nonsensical. The first signs of reflation is asset prices is likely to be driven by a tide of inflation. Nominal prices may be rising while real prices stagnate or decline. There will be no return to the false prosperity of last boom until a decade has past, and global economies have deleveraged (probably by constructive default).

Sadly the worst of this is still to come.

Global Interest Rates on the Up

2010-01-21T10:38:00.004+11:00

Interest rates are headed up sharply and quite possibly in 2010. Those countries that are pursuing responsible monetary policies such as Australia will suffer less that those with irresponsible and expansionary policies but the direction of interest rates will still be the same.

As Karen maley's article from today's Business Spectator (see link) states, the most exposed Euro block countries include: Portugal, Ireland, Greece and Spain. These countries are running unsustainably large deficits that should be causing their creditors in the bond markets much concern. These nations and their irresponsible policies may well jeopardise the Euro's future.

Even these nations may well be the tips of the iceberg as larger economies such as Great Britain, the United States, and Japan are also running large deficits, expansionary monetary policies and demonstrating a deficit of political will to fix their structural problems.

Currency instability and rapidly rising interest rates may well be the consequence. A debt default by one sovereign nation may be the catalyst that sends global credit to the wall and gold into the stratosphere.

2010

2010-01-15T11:35:00.002+11:00

"The risk that deteriorating government finances could push economies into full-fledged debt crises tops a list of threats facing the world in 2010, according to a report by the World Economic Forum"

A repricing of sovereign risk in 2010 could be the catalyst for rapidly rising interest rates on a global scale and finally put an end to the bailoutorama that has characterised the GFC to date. The question remains will the US Dollar be repriced to reflect the innate insolvency of the United States?

Welcome back for 2010....more soon.

Plain Talking

2009-11-18T16:29:00.002+11:00

In this article by Martin Wolf from the Financial Times (and quoted from Business Spectator) Mr. Wolf clearly lays down the essential and fundamental requirements for a sustainable economic rebalancing between China and the United States.

Mr. Wolf imagines the following threat from President Obama:

"I would then argue that China’s determination to thwart needed adjustment in exchange rates had become intolerable. The US is entitled to protect itself against such mercantilism. The trading system would be terribly damaged. But the alternative would be unbearable."

In decades of cold war with the Soviet Union the concept of Mutually Assured Destruction helped ensure that no nation would press the button. Sadly in this catastrophe there is no alternative. China and the United States will need to break there damaging co-depency, and when it occurs it will be a painful process for both parties and the wider economic community.

No Country for Old Bulls

2009-10-30T15:23:00.002+11:00

Please check the link above to today's article from Alan Kohler at Business Spectator. The most interesting part of this article is actually, that with which the author disagrees, namely his quotes from Messrs. Newman and Sprott.

Maurice Newman, chairman of the Australian Broadcasting Corporation, and former chairman of the Australian Stock Exchange, is quoted as per follows:

“Between 1990 and 2007, we saw the biggest credit explosion and consumption binge in history. This liquidity created a deep fundamental disequilibrium between surplus and deficit countries. While financial markets have tried to redress this, they have been frustrated by well-meaning government intervention designed to soften the impact."

“In the US, the legacy of these policies is a mandated liability of $US111 trillion, which roughly equates to $US365,000 per man, woman and child, or $US1.3 million for a family of four. Only about 10 per cent of all these obligations have been fully funded. The rest are unfunded or underfunded commitments which will fall due over time. "

“In the meantime, the US government must borrow $US3.5 trillion over the next year which is equivalent to all the debt raised between 1789 and 1994. It will take 75 years of double digit growth to pay back."

“The 2009 budget deficit came in at a little over $US1.40 trillion or about 10.0 per cent of GDP and three times the shortfall of 2008. It is expected to reach US$1.5 trillion this year. The Obama administration’s own estimates project the ten year deficit to be $US9 trillion, recently revised up from $US7 trillion, so there is little improvement in prospect.”

These comments support what this blog has been asserting for some time. While the debt bubble has burst, the dollar bubble remains. As Mr. Newman most astutely implies these problems did not arise overnight but have been building as part of a medium term cycle over decades. Personally I was around the last 90's when I first perceived the early signs of bubbletopia.

The second quote is from a Mr. Eric Sprott, described as a Canadian fund manager and his comments on the U.S. deficit:

“…in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200 per cent in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28 per cent from September 2008 to July 2009 – far short of what the US government required.“

"The US taxpayer can’t cover the difference either. According to recent estimates, tax revenue from all sources would have to increase by 61 per cent in order to balance the 2010 fiscal budget. Given that state government income tax revenues were down 27.5 per cent in the second quarter, the US government will be lucky just to maintain its current level of tax revenue, let alone increase it.”

“From 2004 to 2009, US unfunded obligations increased by an average of almost 50 per cent…while US government revenue increased by only 12 per cent. No company or government can increase its liabilities by more than four times the rate of its revenue and stay solvent for an extended period of time.”

Most interestingly Alan Kohler quotes these gentlemen, but disagrees with them. On the issues of timing I also see the possibility of a limited pick up in the Australian economy in the new year. However, no one can escape the short- to medium-term consequences of the American Insolvency.

It has been said before, but if there is a loss of faith in the US dollar the stampede to alternatives could trigger a number of changes in very rapid succession. These include rapid interest rate rise largely outside the control of central banks. Hopefully if we can continue our responsible monetary policy and continue to raise rates we could be well placed to again weather this global shockwave.

The reality is that there is no light at the end of this economic tunnel. The US' economic policies and concommitant spending are unsustainable. Currency collapse, economic depression and difficult longer term economic adjustments are inevitable now in the United States.

By the way if you are new to this blog I STRONGLY recommend you read the first post from August 10, 2004 where the Great Recession was described, predicted, and named well before the event.

On Trial

2009-10-26T14:12:00.006+11:00

David Reilly's article in Bloomberg asks the question; who's face should adorn a US $1 million bill. His article postulates a Weimerian collapse of the greenback, and in this, he is now far from alone. The answer, he concludes, is inescapably correct, the US consumer should be the face of the new bill.

I would rather not issue a pardon so early for the villians of this disaster. Let's review his list of potential perps:

Ben Bernanke: Verdict: Case dismissed.

Helicopter Ben came far to late to the scene. The reality is that the factors that have created the Great Recession could be first observed in the mid- to late- 90's.

Bernie Madoff: Verdict. Guilty........but not of currency assassination.

George W. Bush: Verdict. Guilty.

Tax cuts, unconstrained spending, combined with the folly of the Iraq war, laid the foundations the US's disasterous economic state. The only redeeming feature of this administration was its consistency.......... in unrelenting awefulness at everything it attempted.

Wen Jiabao: Verdict. Not guilty by virtue of self defense.

Fascist China's relentless pursuit of mercantilist growth has served it well and the US has paid the price for its lack of vision (yes I know where I stole that from).

Henry Paulson: Verdict. Case dismissed.

In the line-up but no where near the murder weapon.

Richard Nixon: Veridct: Guilty of many things including introducing instability into the fiat system.

Unlike G.W. actually achieved a few things.

Alan Greenspan: Verdict: Guilty of first degree currency murder!

A feature of this blog from early on. Al's relentless easy money program mitigated the post dotcom recession by creating the foundations for a depression. Neither the stock market bubble, house price bubble, or debt securitisation bubble fazed easy Al.

With the collapse of the US dollar bubble his failure will be complete (yes I know). Welcome to the $1,000,000 bill Al!

Murder Suicide

2009-09-15T11:10:00.005+10:00

Ed Harrison, writing in his blog Credit Writedowns has an arresting take on the subject: “With this trade war looming, one must wonder if Chimerica, the marriage of China and America as one economic entity, will end in murder-suicide, taking the global economy down with it.”

Follow the link above to Alan Kohler's article in today's Business Spectator. The concept of Chimerica, and economic union between the United States and China is a fallacy. It is best described as a co-dependency where China produces and America consumes. It is a core part of the Chinese mercantilist economic policy which has so damaged the US's productive base. It could be fairly said that this is not due to China alone, but over the last decade its has been the strongest contributor to this process. I was actually quite surprised with the Chinese response to the US tyre tarriffs. A trade war with China will hurt the US, but it would be a disaster for the Chinese economy. This would clearly be an area where quiet diplomacy would be in China's interest. Playing the trade war card with the US is in my opinion a grave strategic mistake from the Chinese. It seems that nationalistic sentiment, spured on as a tool of social control by the Chinese communist party is developing a life of its own. Nationalism and totalitarianism are the key foundations of fascism. A point no doubt that we will be increasingly made aware of as the economic relationship between China and the West breaks down and a new one rises to take its place.