Wednesday, November 23, 2011

The Global Debt Crisis: How Things Got This Screwed Up

Total US debt Image source

The global debt crisis is highly complex, yet in its ultimate causes, extremely simple.

Speaking before the Senate of the United States on October 5, 1994, Sir James Goldsmith said:
I believe that GATT... [i]f it is implemented, ... will impoverish and destabilize the industrialized world while at the same time cruelly ravaging the third world.
That is precisely what has come to pass.

Since 1994, wage arbitrage by multinational corporations, the majority of which are controlled by a few dozen financial entities, has destroyed tens of millions of jobs in Western Europe and North America, while driving up many-fold the value of the most successful exponents of off-shoring and outsourcing: companies such as Apple, IBM and Microsoft.

How have Western nations handled the job losses?

By maintaining consumer spending without regard for the loss of high-skills, high-wage, long-term jobs.

How have they done maintained consumer spending? By keeping real interests rates near zero or less, thereby enabling consumers to replace income with debt. Much of the consumer credit went into housing, which being largely a local industry, concealed the loss of long-term manufacturing, design, engineering and other professional jobs.

How have China and other developing nations handled the job gains?

By keeping wages and hence consumer spending low to achieve annihilating export competitiveness with high-wage Western workers, while enabling a tsunami of cheap credit to flow into job-creating investment in manufacturing and export service industries, with much of this money slopping over into real estate, including investment in China's empty cities.

So why isn't everyone happy?

Lenders are not happy because, globally, debt has grown to 350% of World GDP. This makes them nervous. As a result, German Bunds, debt of the fiscally most conservative government in Europe, are no longer in great demand, which means that interest rates globally are set to rise.

Consumers in the West are not happy because the property booms are turning to bust, which means that, in America, for example, half of all home owners are now underwater on their mortgage if the cost of selling their property is taken into account. That means consumers have lost credit-worthiness and so must cut consumption.

Less spending by one consumer means less work for another, which means less spending, etc.

In short, Western economies are imploding. Government spending is skyrocketing as welfare programs are stretched far beyond their design limits, while tax revenues plunge, which means that just as consumers were forced to stop borrowing, governments have started borrowing on a massive scale in order to finance budget deficits of 10% or more of GDP in the US, the UK, Greece, etc. In Japan, Government debt service now consumes more than half of all government revenue. An interest rate increase of one or two percent could bankrupt Japan.

In the developing World, the jobs boom is slowing as Western consumer demand shrinks, and corporate profits, often paper-thin at the best of times, turn to losses resulting in bankruptcy. At the same time, fear of recession or depression is killing the mania for real estate as a store of value, which means that Asian property bubbles are bursting just as industry slows.

So what happens now?

Will growing reluctance of lenders force governments to stop borrowing and spending, resulting in the new great depression?

Is the hyperinflationary money printing about to begin?

Ha! Who knows?

In Germany, during the Weimar era, corporations printed their own money. Makes sense, heh! Why not GM? Looks like the only way you'll be able to get the price of those clunky looking cars down to where people will actually buy in real numbers (But why not make something neat like this?).

But that's just guessing. Anything's possible, and even the impossible will no doubt be tried. That's why this is such an awesome spectacle.

But what is to be feared is that Governments, having deliberately followed destructive fiscal and monetary policies to a dead-end, may now be about to provide proof that war is merely a continuation of business by other means.

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