This post carries a health warning!

Feeling alright, are you?  Got over your election blues?  Looking forward to summer and feeling really rather cheerful?  Then don't read this post!  And don't blame me, blame my e-pal Allan Sullivan who pointed me in the direction of an essay by 'Spengler' in The Asia Times.  I am not going to attempt to paraphrase it, I will just copy and paste some of the essence of his thoughts whilst urging you all to read it in full:

This was supposed to have been the final triumph of John Maynard Keynes, the crisis in which governments actually did what he urged them to do during the Great Depression, the proof that an elite of puppeteers in control of monetary and fiscal policy could make the innumerable actors in economic life march wide-eyed toward recovery.

Keynes' idea is simple; in fact, it is simple by construction, for it focuses on the very short term within a closed economy. If consumers won't spend, the government will spend for them; if businesses won't invest, the government will invest for them; and if investors won't take risks, the central bank will reduce the yield on low-risk investments to almost nothing.

Nowhere was this seized upon with more enthusiasm than the socialist regime of Barack Obama:

The Barack Obama administration, like most of the world's governments, decided on a massive dose of Keynesian medicine, taking the budget deficit to an unheard-of peacetime level of 13% and keeping short-term interest rates at near zero. [...] And it all seemed to be working. [...] American consumers, right after suffering a US$6 trillion loss in wealth in the form of household equity, and right before the greatest retirement in American history, decided that they did not have to save after all. The savings rate fell and consumer spending rose. American corporations in the S&P 500 index stripped down to skeleton staffs and stopped investing, and declared a 60% rise in profits between the second quarters of 2009 and 2010. And the latest employment data show real improvement in the labor market.

So that's alright then, we can crack open the champagne and relax.  Not according to 'Spengler, we can't!  Keynes' model works perfectly in a closed economy and amongst people who only think in the short term but today we have a global economy and not all investors just think short term.  The daily trading markets, of course, do only think short term which is why they are perpetually taken by surprise when long term factors suddenly bite them in the bum.  And today some of those very factors are about to bare their teeth.  Governments have spent the last two years issuing their own debt which is fine provided that the long term prospects for repaying it are good.  Here in Europe those prospects are grim given the multiplying number of people who are no longer productive and who are utterly reliant on the state, that is mainly the elderly:

The elderly portion of Europe's population [over the next 4 decades]will rise from 24% to 49% of the total, an insupportable burden. Who would want to buy 40-year European bonds?

Especially Greek 40-year bonds given that their population statistics are even worse with an elderly dependency population growing to 59% by 2050.  In the USA, Obama's regime continues to ignore the realities (or perhaps it sees them all too well and is actually looking forward eagerly to the coming catastrophe - but that's another story) :

The premise of Obama's Keynesian exercise is that the US can run a deficit equal to 13% of GDP with a savings rate at 2% of GDP, by borrowing the difference from the rest of the world. The "rest of the world" in effect means the world banking system because most countries have adopted the same sort of deficits.  In fact, two-thirds of the US deficit, according to available numbers, has been financed by foreign banks during the last quarter of 2009 and the first quarter of 2010.

And now you can begin to see why the merry-go-round is beginning to wobble on its axis:

Financing long-term purchases with short-term leverage in countries that cannot hope to repay their debt at the 40-year horizon turns out to have been a dicey idea. In September 2008, when the banking system was about to fail due to the collapse of its investments in US mortages and similar things, governments bailed out the banks. But who bailed out the governments who bailed out the banks? The banks bailed them out, by buying their paper. That is why banks that hold large amounts of weaker sovereign paper may go bankrupt all over again. The stronger governments therefore will support the weaker governments. But there is a limit to how long the charade can continue. [My emphasis]

At least I can say with modesty that here I was ahead of 'Spengler' because I have raised this piece of typical Brown/Balls trickery before:

Once the long term casts its chill shadow on present expectations, investors are shocked - shocked - to encounter financial scams that they previously had ignored. Estimates are now circulating in the press that the United Kingdom actually has public debt equal to 150% of its GDP, rather than the 53% figure usually reported, if unfunded pension fund liabilities are taken into account. [My emphasis]

And, of course, 'Spengler' does not know of the money owed by HMG (or you and me to be precise) on the various PFI(*) schemes which is another piece of Brown/Balls, off-book accountancy malpractice that would see a company director in jail were he to try it on.

So, as you stand on the economic beach you might just notice a very strange phenomenon, the sea, instead of lapping gently round your ankles, has mysteriously withdrawn right back over the horizon - what can it mean?

(*) For some reason probably not unadjacent to the glass of Glenmorangie by my elbow, I originally wrote "PPP schemes".  Must take more water with it!

 

Comments

[dearieme]

It means ... well, to adapt what that civil servant said a few years ago:-

We're all fucked. I'm fucked. You're fucked. The whole [world] is fucked. It's the biggest cock-up ever. We're all completely fucked.

[David Duff]

It took me several paragraphs to say what you summed up in six short sentences, 'DM'. Well done!

[dearieme]

Not me; this fella.
http://en.wikipedia.org/wiki/Richard_Mottram