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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5857074/Fiscal-ruin-of-the-Western-world-beckons.html
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 64 | 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.
Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.
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 e_SEmD 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 e_SEmD famously building bridges to nowhere in Hokkaido e_SEmD 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 e_SEmD 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.
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http://www.telegraph.co.uk/finance/...Fiscal-ruin-of-the-Western-world-beckons.html
Ambrose Evans-Pritchard
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Comments: 64
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Indeed article recommended by Quentin:
http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html
is very insightful. But read also this:
http://gregpytel.blogspot.com/2009/06/credit-default-swaps-cds-financial.html
this explains clearly why things got out of hand and the role in the crisis of instruments such as CDS
Andrew T
on July 19, 2009
at 12:35 PM
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It takes years (for most of us) to save up for something worth having.
It takes minutes to buy it.
If you can get a fool to lend you the cost you can have it without waiting.
But then:
YOU WILL SPEND YEARS PAYING FOR IT.
So simple.
Pity they don't teach it to labour politicians.
But it doesn't matter a jot to them - they won't be paying will they?
Sparky
on July 19, 2009
at 12:30 PM
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The acronym has potential. PIGS became PIGIS. If the UK goes next, we get PIGISUK. We cannot let France go down or we will have:
PIGI*UKS.
(Why is it that PIGI conjures up a mental image of beady-eyed, fat, pink bankers?)
Buy gold. Love Big Brother.
David S
on July 19, 2009
at 12:07 PM
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Peter Cooper.
Weren't you the one who, both on here and in your blog, was pleading with us to buy into the Dubai property market just before its collapse? Tssk.
Michael Anthony
on July 19, 2009
at 12:07 PM
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Good post David Wilson.
If you have not you should all look at The International Forecaster, Editor Bob Chapman.
http://www.theinternationalforecaster.com
Why in the name of Heaven do we live like this, giving our real wealth to the privately owned, FOR PROFIT banks?
W
There is nothing at all to stop us taking over the whole of our money system - print it, distribute it to our own community banks which will make it available free of interest, or at very, very little interest, to any citizen who needs credit.
Be rid of the Bank of England whihc is owned by the Rothschilds and their friends - but they are the biggest shareholders, be rid of the "Federal" "Reserve" "Bank" and close down the Bank of International Settlements asap.
This is all nothing but usury. They create phantom money out of NOTHING - pretend to "lend" it to us, AND charge us interest, huge compound interest for what cost them NOTHING whatsoever!
In other words, they take our actual, our real wealth from us by a trick, a slight of hand.
THAT is what HAS to stop - or we are doomed to slavery, real grinding poverty and slavery - and Death.
Look into www.webofdebt.com and into www.globalresearch.ca
And WAKE UP/
Astraea Shaw
on July 19, 2009
at 12:07 PM
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Ambrose � you need to clarify just how monetary policy is supposed to clear this mess.
Look at the figures from Bank of Englands Asset Purchase Facility - http://www.bankofengland.co.uk/markets/apf/results.htm
The program has spent (created) 117 billion �. 114 billion � of this QE attempt has been spent buying old gilts in the market. This leaves it up to the sellers of these old gilts how to deal with the created money. What can banks, hedge funds, mutual market funds, pension funds do with this money in a deflationary spiral? Lend it to � whom? No lending on a sufficient scale can take place as long as securitization is dead because the lender has to keep the loan on his balance sheet which is already suffering from �toxic assets�. And securitization (leading to mispricing of risk) is what caused this mess.
Banks sit on the cash because it backstops it�s toxic assets. Banks play with any additional funds buying shares (and new gilts �), creating an unsustainable rally in shares and keeping the gilts rate artificially low.
No matter how loose the monetary policy might get at this junction, you cannot force lenders to put money into businesses on the brink of bankruptcy. You cannot force lenders to lend money to new business initiatives in a world where 40% of output capacity is sitting idle. No matter how much QE you attempt, this excess capacity has to be reduced.
It would be interesting to know your thoughts on exactly how QE is a viable path to recovery. GDP on a global scale has been bloated with debt � almost all increase in GDP this century is due to debt, that is demand being pulled forward by debt � and this cannot be done again. Therefore GDP simply has to shrink. You can calculate how must it must shrink by comparing increase in GDP pr capita and increase in GDP in aggregate. You will find that overall GDP has risen substantially more than GDP per capita. This % shows you how much demand has been pulled forward, that is to say how much debt has been taken on by individuals to fuel GDP growth. When overall GDP and GDP per capity is at par, the contraction will come to an end. But how does QE prevent or make this contraction unnessecary? You tell me.
John Henriksen
on July 19, 2009
at 11:10 AM
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I am a great fan of yours, Ambrose, but you are like an ancient Greek oracle who accurately tells us that an earthquake is coming but doesn't tell us which way to run or what to take with us.
The problem is, Ambrose, we all know that we are totally stuffed but what we also want to know is whether we should buy gold, take our cash out of the bank and bury it safely in the garden or buy a caravan and a piece of remote Scottish land and fill it with canned goods, sacks of rice and pasta and kerosene for our lamps (oh yes, and a shotgun to protect ourselves from starving gangs of marauding urban survivors).
Charles Lee
on July 19, 2009
at 11:10 AM
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The Great American Bubble Machine.
From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again.
http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine
John
on July 19, 2009
at 11:10 AM
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Secession of regions from states (UDI), followed by the privatisation of all property in the seceded region, is the answer. This will be done - the only question is when, how quickly, in how orderly a fashion. And where it will begin. The reckoning for the nation-state is at hand.
Advocatus diaboli
on July 19, 2009
at 11:08 AM
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D Rumsfeld
Obamie is another disaster. I have told my left wing acquantances as much, and they are shocked. Obama is above critique. This is the type of nonsense that gets us into this sort of mess. Obama is not an economist. Obama is a lawyer. Bush II was a lawyer, so was Clinton 1.0, Nixon, LBJ, etc.. I think you will detect a trend here - Lawyer becomes President, and a whole series of economic policy mistakes follow.
The US is another country where the lawyers are in control. Is it any wonder that the economy ends up in a mess ?
India have an economist in charge of the Indian Federal government. In the early 1990s, Singh was minister for Finance, and the IMF told him that they were going to have to take over the Indian national bond market, and regulate the Ruppee. To which Singh replied ' if you control the Ruppee, 900 Million Indians will use gold and silver as their currency'. That was the last thing the IMF wanted to see. And that was also the end of the IMF wanting to regulate in the Indian economy. Interestingly enough, with India is less affected by the credit crunch, and seems more concerned about the late Monsoon.
Micko
on July 19, 2009
at 11:02 AM
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Harbinger of doom and fear-monger-in-chief Ambrose Evans-Pritchard strikes again.
Except that his previous announcements of impending financial collapse - the inevitable fiscal downfall of Central Europe due to its over-exposure in Eastern Europe and the general implosion of any kind of market activity in emerging markets - all failed to even remotely materialise.
Ben Mueller
on July 19, 2009
at 10:58 AM
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Ireland is doing it right. They are trying to borrow as little as possible and they are making huge cuts. Over 6000 teachers will be sacked.
Why doesn't Gordon Brown realise that things have to be cut?
The UK Government has said it will have to borrow �175 billion this year and the Budget 2009 said that �28 billion of tax payers money will have to pay interest payments.
This is absolutely ridiculous
Luke Hutchison
on July 19, 2009
at 10:58 AM
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At least Ireland is trying to save itself.
Gordon Brown would rather we went to hell in a handcart than admit any kind of failure.
James, Balham
on July 19, 2009
at 10:58 AM
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Everybody and his dog knows you have to cut down on spending when things are tight,everybody except Comrade Brownski that is,Immigrants are piling in daily,our jails are stuffed with them,we are spending billions every year on them,and now the great man has earmarked NINE BILLION for overseas aid in 2010,we are in a war that cant be won in Afganistan which is costing us billions,no one in the Country wants this man as PM but will he go? we cant get rid of this unelected moron,the saying goes,A fool and his money are soon parted,we have both, this man knows nothing about finance whatsoever,he is bluffing his way through like Politicians are all over the World,we are letting a handful of idiots destroy us.
Lord Barnett
on July 19, 2009
at 10:26 AM
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Which is the most lethal? -
Our incompetent politicians handling of the swine flu pandemic or our incompetent politicians handling of the financial global meltdown.
It's hard to figure out which is more scarier!
Is there anbody out there who can save us?
albany dubeque
on July 19, 2009
at 10:26 AM
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I am the regular reader of Mr. AEP commentaries, however I have no idea what "e_SEmD" means.
Stan
on July 19, 2009
at 10:26 AM
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HMG has three pressure points...after spending 10 billion POUNDS in Iraq (foolish venture) another extended war looms in Afghanistan needing another 5 billion POUNDS with new helicopters and a force of 10,000 soldiers under fire...pensions for civil servants are a constant drain as more retire like BBC executives.....finally with 4 million out of work by next year the economy will be in ratcheting-up huge debts needing foreign inflows at higher interest rates as the POUND is in decline as predicted by the IMF.
PM Brown is trapped...he is flying with no uplift....standby for heavy landing!
rathbone
on July 19, 2009
at 10:26 AM
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Fascinating article. The type of discussion that is banned in Ireland for the next few months. (There has been a precedent for this-the Irish Economics Reporting Institute, the ESRI - refused to declar that Ireland was in recession, until two days after Lisbon, Part One. In fact I have submitted comments to Irish newspapers and they never appear. (An interesting side note is that French left wing media blamed Ireland's no vote on the influence of the British media - I am Irish, and we have learned that we cannot trust the Irish media. The Irish media are heavily reliant on the banking sector and the government for advertising revenue. Or the BBC/Guardian/Observer, London Indo, etc. for that matter, either.
The Irish have to reform because the Irish banking system is insolvent withount support from the ECB, because the Irish state has become grossly inefficient and expensive, and because small economies always run out of cash faster than large ones. Ireland is one of the PIGIS. And the Euro-PIGIS are all in trouble. Especially Spain.
The Germans have reformed their state system, and have responded to deflation. Now the Germans will have to do all that again. But Germany will manage. The Irish fixed the economy twenty years ago, and will adapt to the challenge again. The low probability of Basically the Irish are capable of getting the work done, even if the Irish success rate at any form of institutional reform is abysmal.
The problem is not the Welfare state as it was originally envisaged in the 1940s. That was a very efficient welfare state compared to what exists post 1967. The problem is that the Welfare state itself grew into a monstrosity as it became an untameable parasite on the rest of society. "Institutional aggrandisement" took over as an overwhelming objective. This resulted in uncontrolled growth and expansion of the wlefare system, as it sought to do things that were never originally in the plan. A cadre of left wing politicians took up "the cause" and did everything to justify the existence of the state, in reaction to Thatcher and Reagan. In the process they turned the Welfare state loose.
What has failed is the absurdly illogical version of the welfare state that emerged in the 1990s as a result of a generation of fools taking control of the political system. This is best exemplified by that dothering idiot Gordon Brown in "Number 11, Dowling Street" in the UK, and the policies of Bill Clinton and the Dumbocrats-which created the subprime mentality in the US.
Western Europe has effectively stagnated since 1990. There were more people employed in Western Europe in 1989 than there are now. [And cynically enough there was full employment in Eastern Europe, even if it was bordering on absurdity in East Germany and Czechoslovakia]. This is something very few people know, but is is a fact. "Europe" has been in decline, for two decades. In spite of this, volumes could be written to contain the arrogance that comes from Brussels, as the 'institutional aggrandisement' that is talking place in Brussels gathers pace. In the midst of the continuing decline and malaise, Brussels has responded with one program of centralisation upon another. The worse things get, the more Brussels will try to make things worse. The French voted Non, and the left wing French media decided that they were ashamed of the people, and that there was something inherently inadequate in the French people. The Dutch voted Neij, and the Dutch media had the good sense to declare that something had gone wrong with the European project. The Dutch politicians nevertheless betrayed the people anyway. The Irish voted no, and the Irish media then prepared the Irish people for a guilt ridden path to redemption that belongs in a 1950s novel about obedience to the Vatican.
Ambrose is correct. The problem is the state. The state as it has evolved has become one big Rooseveltian monstrosity with jobs for insiders, seeking excuses to justify it's expansion at every available opportunity. This is exemplified by the Nu Lab response to the financial crisis. No British bank has been allowed to fail. Instead the state takes them over, and starts rehabiliting them like as if they were drug addicts or repeat offenders. Then the authorities get involved in a mishmash of supervision which makes nobody responsible for any wrong doing, and allows everybody to pronounce that things are getting better.
The Western model of the state is failing. It is not failing as fast as the Soviet failure in the 1980s, because the state is not as powerful as occurred in the Communist system. The failure of the liberal-marxist lite state is just as inevitable, even if it is on a slower trajectory. And like the Russians in the 1980s, denial of this is rampant in the institutional framework of society. For the second time, with absolutely devastating consequences, Karl Marx has been proven completely wrong. Magna Carta is the protector of the Common Man, not institutional aggrandisement. New Labour have turned their back on Magna Carta and opted for the Institutional state. New Labour have turned their back on the legacy of Nelson and Wellington and the British way of life.
Only the Irish can stick a spanner in the works. And the media in Ireland are obsessed with their own sectoral financial short term predicament, to the point that they will not look at the real crisis.
Of course Lisbon might get passed, the ECB might continue bailing out the PIGIS, the Germans might continue to run up debts, the British pound might descend to the point that it is as useful as a Nu Labour economic policy docement. And when this happens,the neo-Marxists in the European institutions will respond with another program of centralization to make it even worse.
Thank you Ambrose for standing up and saying something that urgently needed to be said. The entire Western lifestyle is unsustainable. And the state institutional framework is even more unsustainable.
Micko
on July 19, 2009
at 10:20 AM
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Strange how people seems to catch on so late in the day.
America was broke years ago.
The FED has been printing money for Russia and China to buy back US Debt.
The game is up. When the FED audit happens, you will see.
Paul C
on July 19, 2009
at 10:20 AM
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JR @7.14 a really good post!
Quote:-
"However,these days money is nothing but a medium of exchange with all other functions of money having ( been)willfully destroyed by governments." (I have inserted "been")
Spot on! We are beguiled into thinking that money is a simple tool and that we understand it. It's not, and most of us don't. I would love to read more about the wilful destruction of these other functions of money, as I am sure this has happened. An explanation of how, when, why and who benefits would be very revealing!
Also, another stimulating article by AEP-thanks!
nemo
on July 19, 2009
at 10:15 AM
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Robert Browne (IE).
{ Mr. Cowen is one of the most anal retentive leaders we have ever had. }
Are you sure ? I mean CJH was bad and corrupted the entire political syste, in Dublin and nationally. Lemass was not all he was cracked up to be, with his belief in national champions who operated like monopolists. Fitzgerald was fiscally challenged, and appointed idiots to key ministries. And finally we had Ditherer(Ahern) who in my estimation was the very worst liar we ever had to endure. Ditherer was obsessed with leaving the Irish with legacy, for which the Irish would not be able to forget him. And sure enough, this is exactly what has happened.
In Ireland we have 800 quangos. A quango is a state funded body with official responsibility of supervision of the governments policy in some area. This is usually staffed with junior members of political parties, who are unemployable in the private sector. Often the people in these organisations have degrees in dead languages, or masters in irrelevant nonsense. They tend to have spent most of the university time in the college bar, involved in student politics, and just generally drifting around. It is effectively opting out. n when They reach the age of 26, and they realise they need a job. The political contacts get them into a quangoed. I have been told that this is very common in the other PIGIS countries also.
Perhaps some of the other reader could tell me if this also happens in Britain.
Anyway, we need to dissolve the quangos. And if you have quangos in your country, you need to do the same. In Ireland, we had the situation of quango officials flying around in helicopters to see if the farmers were spreading cowdung on wet grass, whilst the builders were flying banking executives to Old Trafford to soften them up, and help them provide hundred million Euro loans for property schemes. This was justified by an overzealous approach to the implementation of EU directives.
Now, both sets of helicopters are grounded. In a brief moment, at the height of a boom, when BMWs were becomming common, it was the ultimate status symbol.
Have you (as a taxpayer) been quango'ed ? I bet you all have. McCarthy's report wants to de-quango Ireland, and overturn a generation of absurd institutional aggrandisement. Other countries need to do the same. But denial and deceit are widespread, at the behest of those who have no economic utility, thanks to their own irresponsibility.
{With apologies to the company who used the Tango ads
))}
Micko
on July 19, 2009
at 10:15 AM
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The solution?
1) Bring about sound money whatever the pain.
2) Reduce taxes and let the people make the economic decisions They will bring prosperity again, not government
There will be massive pain, huge reaction from the masses. Anything else, though, will merely postpone the inevitable.
John Laycock
on July 19, 2009
at 10:15 AM
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Whilst I broadly agree with Ambrose, I do not think his piece reflects the real gravity of the problem. It is like that but much, much worse.
Read below. It is clearly, intelligently and well written, and really scary as there seems to be no end to this mess.
http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html
Quentin
on July 19, 2009
at 08:55 AM
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Go back to a 100% gold-backed currency, outlaw fractional-reserve lending, allow interest rates to equilibrate without artifical edicts in a truly free capital market, and force government to stop deficit spending and balance its budget. These are honest statements of economic thinking----not Keynesian nonsense promoted by statists who can't get enough of state intervention.
acudoc
on July 19, 2009
at 08:54 AM
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Where do I put my money?
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 64 | 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.
Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.
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 e_SEmD 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 e_SEmD famously building bridges to nowhere in Hokkaido e_SEmD 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 e_SEmD 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.
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http://www.telegraph.co.uk/finance/...Fiscal-ruin-of-the-Western-world-beckons.html
Ambrose Evans-Pritchard
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Comments: 64
*
Indeed article recommended by Quentin:
http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html
is very insightful. But read also this:
http://gregpytel.blogspot.com/2009/06/credit-default-swaps-cds-financial.html
this explains clearly why things got out of hand and the role in the crisis of instruments such as CDS
Andrew T
on July 19, 2009
at 12:35 PM
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It takes years (for most of us) to save up for something worth having.
It takes minutes to buy it.
If you can get a fool to lend you the cost you can have it without waiting.
But then:
YOU WILL SPEND YEARS PAYING FOR IT.
So simple.
Pity they don't teach it to labour politicians.
But it doesn't matter a jot to them - they won't be paying will they?
Sparky
on July 19, 2009
at 12:30 PM
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The acronym has potential. PIGS became PIGIS. If the UK goes next, we get PIGISUK. We cannot let France go down or we will have:
PIGI*UKS.
(Why is it that PIGI conjures up a mental image of beady-eyed, fat, pink bankers?)
Buy gold. Love Big Brother.
David S
on July 19, 2009
at 12:07 PM
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Peter Cooper.
Weren't you the one who, both on here and in your blog, was pleading with us to buy into the Dubai property market just before its collapse? Tssk.
Michael Anthony
on July 19, 2009
at 12:07 PM
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Good post David Wilson.
If you have not you should all look at The International Forecaster, Editor Bob Chapman.
http://www.theinternationalforecaster.com
Why in the name of Heaven do we live like this, giving our real wealth to the privately owned, FOR PROFIT banks?
W
There is nothing at all to stop us taking over the whole of our money system - print it, distribute it to our own community banks which will make it available free of interest, or at very, very little interest, to any citizen who needs credit.
Be rid of the Bank of England whihc is owned by the Rothschilds and their friends - but they are the biggest shareholders, be rid of the "Federal" "Reserve" "Bank" and close down the Bank of International Settlements asap.
This is all nothing but usury. They create phantom money out of NOTHING - pretend to "lend" it to us, AND charge us interest, huge compound interest for what cost them NOTHING whatsoever!
In other words, they take our actual, our real wealth from us by a trick, a slight of hand.
THAT is what HAS to stop - or we are doomed to slavery, real grinding poverty and slavery - and Death.
Look into www.webofdebt.com and into www.globalresearch.ca
And WAKE UP/
Astraea Shaw
on July 19, 2009
at 12:07 PM
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Ambrose � you need to clarify just how monetary policy is supposed to clear this mess.
Look at the figures from Bank of Englands Asset Purchase Facility - http://www.bankofengland.co.uk/markets/apf/results.htm
The program has spent (created) 117 billion �. 114 billion � of this QE attempt has been spent buying old gilts in the market. This leaves it up to the sellers of these old gilts how to deal with the created money. What can banks, hedge funds, mutual market funds, pension funds do with this money in a deflationary spiral? Lend it to � whom? No lending on a sufficient scale can take place as long as securitization is dead because the lender has to keep the loan on his balance sheet which is already suffering from �toxic assets�. And securitization (leading to mispricing of risk) is what caused this mess.
Banks sit on the cash because it backstops it�s toxic assets. Banks play with any additional funds buying shares (and new gilts �), creating an unsustainable rally in shares and keeping the gilts rate artificially low.
No matter how loose the monetary policy might get at this junction, you cannot force lenders to put money into businesses on the brink of bankruptcy. You cannot force lenders to lend money to new business initiatives in a world where 40% of output capacity is sitting idle. No matter how much QE you attempt, this excess capacity has to be reduced.
It would be interesting to know your thoughts on exactly how QE is a viable path to recovery. GDP on a global scale has been bloated with debt � almost all increase in GDP this century is due to debt, that is demand being pulled forward by debt � and this cannot be done again. Therefore GDP simply has to shrink. You can calculate how must it must shrink by comparing increase in GDP pr capita and increase in GDP in aggregate. You will find that overall GDP has risen substantially more than GDP per capita. This % shows you how much demand has been pulled forward, that is to say how much debt has been taken on by individuals to fuel GDP growth. When overall GDP and GDP per capity is at par, the contraction will come to an end. But how does QE prevent or make this contraction unnessecary? You tell me.
John Henriksen
on July 19, 2009
at 11:10 AM
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I am a great fan of yours, Ambrose, but you are like an ancient Greek oracle who accurately tells us that an earthquake is coming but doesn't tell us which way to run or what to take with us.
The problem is, Ambrose, we all know that we are totally stuffed but what we also want to know is whether we should buy gold, take our cash out of the bank and bury it safely in the garden or buy a caravan and a piece of remote Scottish land and fill it with canned goods, sacks of rice and pasta and kerosene for our lamps (oh yes, and a shotgun to protect ourselves from starving gangs of marauding urban survivors).
Charles Lee
on July 19, 2009
at 11:10 AM
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The Great American Bubble Machine.
From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again.
http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine
John
on July 19, 2009
at 11:10 AM
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Secession of regions from states (UDI), followed by the privatisation of all property in the seceded region, is the answer. This will be done - the only question is when, how quickly, in how orderly a fashion. And where it will begin. The reckoning for the nation-state is at hand.
Advocatus diaboli
on July 19, 2009
at 11:08 AM
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D Rumsfeld
Obamie is another disaster. I have told my left wing acquantances as much, and they are shocked. Obama is above critique. This is the type of nonsense that gets us into this sort of mess. Obama is not an economist. Obama is a lawyer. Bush II was a lawyer, so was Clinton 1.0, Nixon, LBJ, etc.. I think you will detect a trend here - Lawyer becomes President, and a whole series of economic policy mistakes follow.
The US is another country where the lawyers are in control. Is it any wonder that the economy ends up in a mess ?
India have an economist in charge of the Indian Federal government. In the early 1990s, Singh was minister for Finance, and the IMF told him that they were going to have to take over the Indian national bond market, and regulate the Ruppee. To which Singh replied ' if you control the Ruppee, 900 Million Indians will use gold and silver as their currency'. That was the last thing the IMF wanted to see. And that was also the end of the IMF wanting to regulate in the Indian economy. Interestingly enough, with India is less affected by the credit crunch, and seems more concerned about the late Monsoon.
Micko
on July 19, 2009
at 11:02 AM
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Harbinger of doom and fear-monger-in-chief Ambrose Evans-Pritchard strikes again.
Except that his previous announcements of impending financial collapse - the inevitable fiscal downfall of Central Europe due to its over-exposure in Eastern Europe and the general implosion of any kind of market activity in emerging markets - all failed to even remotely materialise.
Ben Mueller
on July 19, 2009
at 10:58 AM
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Ireland is doing it right. They are trying to borrow as little as possible and they are making huge cuts. Over 6000 teachers will be sacked.
Why doesn't Gordon Brown realise that things have to be cut?
The UK Government has said it will have to borrow �175 billion this year and the Budget 2009 said that �28 billion of tax payers money will have to pay interest payments.
This is absolutely ridiculous
Luke Hutchison
on July 19, 2009
at 10:58 AM
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At least Ireland is trying to save itself.
Gordon Brown would rather we went to hell in a handcart than admit any kind of failure.
James, Balham
on July 19, 2009
at 10:58 AM
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Everybody and his dog knows you have to cut down on spending when things are tight,everybody except Comrade Brownski that is,Immigrants are piling in daily,our jails are stuffed with them,we are spending billions every year on them,and now the great man has earmarked NINE BILLION for overseas aid in 2010,we are in a war that cant be won in Afganistan which is costing us billions,no one in the Country wants this man as PM but will he go? we cant get rid of this unelected moron,the saying goes,A fool and his money are soon parted,we have both, this man knows nothing about finance whatsoever,he is bluffing his way through like Politicians are all over the World,we are letting a handful of idiots destroy us.
Lord Barnett
on July 19, 2009
at 10:26 AM
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Which is the most lethal? -
Our incompetent politicians handling of the swine flu pandemic or our incompetent politicians handling of the financial global meltdown.
It's hard to figure out which is more scarier!
Is there anbody out there who can save us?
albany dubeque
on July 19, 2009
at 10:26 AM
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I am the regular reader of Mr. AEP commentaries, however I have no idea what "e_SEmD" means.
Stan
on July 19, 2009
at 10:26 AM
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HMG has three pressure points...after spending 10 billion POUNDS in Iraq (foolish venture) another extended war looms in Afghanistan needing another 5 billion POUNDS with new helicopters and a force of 10,000 soldiers under fire...pensions for civil servants are a constant drain as more retire like BBC executives.....finally with 4 million out of work by next year the economy will be in ratcheting-up huge debts needing foreign inflows at higher interest rates as the POUND is in decline as predicted by the IMF.
PM Brown is trapped...he is flying with no uplift....standby for heavy landing!
rathbone
on July 19, 2009
at 10:26 AM
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Fascinating article. The type of discussion that is banned in Ireland for the next few months. (There has been a precedent for this-the Irish Economics Reporting Institute, the ESRI - refused to declar that Ireland was in recession, until two days after Lisbon, Part One. In fact I have submitted comments to Irish newspapers and they never appear. (An interesting side note is that French left wing media blamed Ireland's no vote on the influence of the British media - I am Irish, and we have learned that we cannot trust the Irish media. The Irish media are heavily reliant on the banking sector and the government for advertising revenue. Or the BBC/Guardian/Observer, London Indo, etc. for that matter, either.
The Irish have to reform because the Irish banking system is insolvent withount support from the ECB, because the Irish state has become grossly inefficient and expensive, and because small economies always run out of cash faster than large ones. Ireland is one of the PIGIS. And the Euro-PIGIS are all in trouble. Especially Spain.
The Germans have reformed their state system, and have responded to deflation. Now the Germans will have to do all that again. But Germany will manage. The Irish fixed the economy twenty years ago, and will adapt to the challenge again. The low probability of Basically the Irish are capable of getting the work done, even if the Irish success rate at any form of institutional reform is abysmal.
The problem is not the Welfare state as it was originally envisaged in the 1940s. That was a very efficient welfare state compared to what exists post 1967. The problem is that the Welfare state itself grew into a monstrosity as it became an untameable parasite on the rest of society. "Institutional aggrandisement" took over as an overwhelming objective. This resulted in uncontrolled growth and expansion of the wlefare system, as it sought to do things that were never originally in the plan. A cadre of left wing politicians took up "the cause" and did everything to justify the existence of the state, in reaction to Thatcher and Reagan. In the process they turned the Welfare state loose.
What has failed is the absurdly illogical version of the welfare state that emerged in the 1990s as a result of a generation of fools taking control of the political system. This is best exemplified by that dothering idiot Gordon Brown in "Number 11, Dowling Street" in the UK, and the policies of Bill Clinton and the Dumbocrats-which created the subprime mentality in the US.
Western Europe has effectively stagnated since 1990. There were more people employed in Western Europe in 1989 than there are now. [And cynically enough there was full employment in Eastern Europe, even if it was bordering on absurdity in East Germany and Czechoslovakia]. This is something very few people know, but is is a fact. "Europe" has been in decline, for two decades. In spite of this, volumes could be written to contain the arrogance that comes from Brussels, as the 'institutional aggrandisement' that is talking place in Brussels gathers pace. In the midst of the continuing decline and malaise, Brussels has responded with one program of centralisation upon another. The worse things get, the more Brussels will try to make things worse. The French voted Non, and the left wing French media decided that they were ashamed of the people, and that there was something inherently inadequate in the French people. The Dutch voted Neij, and the Dutch media had the good sense to declare that something had gone wrong with the European project. The Dutch politicians nevertheless betrayed the people anyway. The Irish voted no, and the Irish media then prepared the Irish people for a guilt ridden path to redemption that belongs in a 1950s novel about obedience to the Vatican.
Ambrose is correct. The problem is the state. The state as it has evolved has become one big Rooseveltian monstrosity with jobs for insiders, seeking excuses to justify it's expansion at every available opportunity. This is exemplified by the Nu Lab response to the financial crisis. No British bank has been allowed to fail. Instead the state takes them over, and starts rehabiliting them like as if they were drug addicts or repeat offenders. Then the authorities get involved in a mishmash of supervision which makes nobody responsible for any wrong doing, and allows everybody to pronounce that things are getting better.
The Western model of the state is failing. It is not failing as fast as the Soviet failure in the 1980s, because the state is not as powerful as occurred in the Communist system. The failure of the liberal-marxist lite state is just as inevitable, even if it is on a slower trajectory. And like the Russians in the 1980s, denial of this is rampant in the institutional framework of society. For the second time, with absolutely devastating consequences, Karl Marx has been proven completely wrong. Magna Carta is the protector of the Common Man, not institutional aggrandisement. New Labour have turned their back on Magna Carta and opted for the Institutional state. New Labour have turned their back on the legacy of Nelson and Wellington and the British way of life.
Only the Irish can stick a spanner in the works. And the media in Ireland are obsessed with their own sectoral financial short term predicament, to the point that they will not look at the real crisis.
Of course Lisbon might get passed, the ECB might continue bailing out the PIGIS, the Germans might continue to run up debts, the British pound might descend to the point that it is as useful as a Nu Labour economic policy docement. And when this happens,the neo-Marxists in the European institutions will respond with another program of centralization to make it even worse.
Thank you Ambrose for standing up and saying something that urgently needed to be said. The entire Western lifestyle is unsustainable. And the state institutional framework is even more unsustainable.
Micko
on July 19, 2009
at 10:20 AM
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Strange how people seems to catch on so late in the day.
America was broke years ago.
The FED has been printing money for Russia and China to buy back US Debt.
The game is up. When the FED audit happens, you will see.
Paul C
on July 19, 2009
at 10:20 AM
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JR @7.14 a really good post!
Quote:-
"However,these days money is nothing but a medium of exchange with all other functions of money having ( been)willfully destroyed by governments." (I have inserted "been")
Spot on! We are beguiled into thinking that money is a simple tool and that we understand it. It's not, and most of us don't. I would love to read more about the wilful destruction of these other functions of money, as I am sure this has happened. An explanation of how, when, why and who benefits would be very revealing!
Also, another stimulating article by AEP-thanks!
nemo
on July 19, 2009
at 10:15 AM
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Robert Browne (IE).
{ Mr. Cowen is one of the most anal retentive leaders we have ever had. }
Are you sure ? I mean CJH was bad and corrupted the entire political syste, in Dublin and nationally. Lemass was not all he was cracked up to be, with his belief in national champions who operated like monopolists. Fitzgerald was fiscally challenged, and appointed idiots to key ministries. And finally we had Ditherer(Ahern) who in my estimation was the very worst liar we ever had to endure. Ditherer was obsessed with leaving the Irish with legacy, for which the Irish would not be able to forget him. And sure enough, this is exactly what has happened.
In Ireland we have 800 quangos. A quango is a state funded body with official responsibility of supervision of the governments policy in some area. This is usually staffed with junior members of political parties, who are unemployable in the private sector. Often the people in these organisations have degrees in dead languages, or masters in irrelevant nonsense. They tend to have spent most of the university time in the college bar, involved in student politics, and just generally drifting around. It is effectively opting out. n when They reach the age of 26, and they realise they need a job. The political contacts get them into a quangoed. I have been told that this is very common in the other PIGIS countries also.
Perhaps some of the other reader could tell me if this also happens in Britain.
Anyway, we need to dissolve the quangos. And if you have quangos in your country, you need to do the same. In Ireland, we had the situation of quango officials flying around in helicopters to see if the farmers were spreading cowdung on wet grass, whilst the builders were flying banking executives to Old Trafford to soften them up, and help them provide hundred million Euro loans for property schemes. This was justified by an overzealous approach to the implementation of EU directives.
Now, both sets of helicopters are grounded. In a brief moment, at the height of a boom, when BMWs were becomming common, it was the ultimate status symbol.
Have you (as a taxpayer) been quango'ed ? I bet you all have. McCarthy's report wants to de-quango Ireland, and overturn a generation of absurd institutional aggrandisement. Other countries need to do the same. But denial and deceit are widespread, at the behest of those who have no economic utility, thanks to their own irresponsibility.
{With apologies to the company who used the Tango ads
))}Micko
on July 19, 2009
at 10:15 AM
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The solution?
1) Bring about sound money whatever the pain.
2) Reduce taxes and let the people make the economic decisions They will bring prosperity again, not government
There will be massive pain, huge reaction from the masses. Anything else, though, will merely postpone the inevitable.
John Laycock
on July 19, 2009
at 10:15 AM
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Whilst I broadly agree with Ambrose, I do not think his piece reflects the real gravity of the problem. It is like that but much, much worse.
Read below. It is clearly, intelligently and well written, and really scary as there seems to be no end to this mess.
http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html
Quentin
on July 19, 2009
at 08:55 AM
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Go back to a 100% gold-backed currency, outlaw fractional-reserve lending, allow interest rates to equilibrate without artifical edicts in a truly free capital market, and force government to stop deficit spending and balance its budget. These are honest statements of economic thinking----not Keynesian nonsense promoted by statists who can't get enough of state intervention.
acudoc
on July 19, 2009
at 08:54 AM
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Where do I put my money?
