For the past three years at least the whole world has been treading a fine line along the edge of a financial precipice. We have daily warnings of dire consequences and alerts and stock markets behaving like a fairground roller-coaster. According to the news, America is about to collapse financially and has been downgraded, the Euro is about to crumble following the potential default of Greece, and possibly Italy, Portugal, Ireland and Spain.
China is suffering an inflationary spiral, and places like Iceland nearly fell of the edge of the world a short time ago. Every one of these countries and events could have or will ‘trigger a new WFC’, it seems. Australia is dependent on China and China is dependent on having a market in Europe and America, and if one goes, they all go. Already China not only owns the lion’s share of all world trade and manufacturing, but it is also keeping the system alive by buying up all the toxic bonds and debts to give the rest of the world something to trade with so their own economy can continue to float.
But this is not a new problem. It surfaced in the 1920’s and again in the 30’s with the Great Depression, and then again in the 50’s and the mid-80’s and now the mother-of-all crises in 2008. The problem has been the same throughout – increasing credit and debt – without the ability to pay. The solution has always been to ‘stimulate the economy’ by going further into debt and/or inflating the currency. Except now, the safety margins are smaller and the reserves are less and the interest repayments are starting to exceed the Gross National Product in some cases, especially in America and Greece. They have already maxed out their Master Cards to pay off the interest on the debts of their Visa Cards and now need something else, like QE3 to try and resolve that problem. But that doesn’t reduce the underlying debt or lessen the problem for the future. The chasm still yawns ahead!
We have had continuous international meetings by all the major countries, including the recent G20, and all they can come up with is another range of Band-Aids. Any lasting solution seems to be beyond their capabilities. They talk about ‘growth’ and ‘bail-outs’ and ‘IMF funding’ and try to keep smiling, but the growth figures are compared with last year’s figures and do not take into account inflation and the lessening value of the currencies. Whole national economies are now entering into (largely secret) debt arrangements that are seemingly impossible to service.
The way the world is heading, the developed countries are simply becoming a resource mine for the manufacturing nations using the lower paid work force in the East and the Western lifestyle is being artificially propped up by more and more credit and debt. There is no political leader anywhere in the world who is strong enough to grasp this nettle. In fact, to remain in power, half the financial deals have to be done away from public scrutiny and only later the truth leaks out. The debt is then passed on to the future generation, but the ability to service it, let alone repay it, has been substantially reduced by removing the resources of the countries and depleting the world’s energy supplies to a level where it will be impossible to generate the required finance. The bubble is getting bigger and being pushed further into the future. It cannot continue. It will have to burst, and it could be sooner than later. And when it does, all the previous catastrophes will appear as ripples beside the next tsunami.
Andrew Haldane, the Bank of England CEO, in a recent speech has admitted that banks are more powerful than governments. Governments are puppets in their hands and that their executives receive salaries over 500 times above the national average. They are ‘too big to fail’ and use this as a bludgeon to grab what remains of national funds. They are robbing the poor to indulge the rich. And it is these very institutions that have caused the problems.
Haldane explains that in the first half of the 19th century, when banking still existed in its original form, the capital put in by the owners of banks usually matched the amount of deposits - that is, bank gearing was 50/50.
In the US, bank gearing is now legally 97%! This means that for every $100 they receive, they can issue credit to the value of $97, which then gives them a reserve of just $3 against this borrowing, which in turn means that when a major creditor defaults, such as the Greek Government, then the banks are in serious trouble. They have overplayed their hand to such an extent that it means a collapse on the scale of Lehman Brothers, Fannie Mae, Freddie Mac and the Iceland National Bank etc, with a knock on effect for all investors. The stock exchanges worldwide collapse, shortly after followed by those of the various national economies.
This is basically the effect of uncontrolled Greed!
And there is no end in sight, nor is there a Plan B. The train wreck looks inevitable as absolutely no-one is prepared to do anything tangible to prevent it. There are just too many vested interests.
Here are just a few things that are wrong:-
1. Banks, governments and corporate wealth are in lockstep. Elections are basically a sham as the real power and influence is with the commercial institutions and lobbyists have the ears of the leaders while the public cannot even get an answer to most of the questions they wish to ask.
2. Loans by the IMF only worsen the debt situation, yet they are being touted as a saviour for embattled governments. Just another Credit Card to pay off the previous one with accompanying demands for austerity and fiscal restraint.
3. All austerity measures are unpopular, and any marginal government will hesitate to introduce them knowing that their personal popularity will decline and they will face defeat at the ballot box. Note the reaction of the Greek people to these measures.
4. Union pressure, especially on left wing governments has achieved an unsustainable level of wage increases for the workers and has ruined many economies. Manufacturing has been driven offshore in order to remain competitive and all that is left is a basket of resources to be sold without value adding. Sometimes unions are their own worst enemies.
Once achieved, high wages remain sacrosanct and no government will attempt to reduce them to a lower level where manufacturing becomes competitive again. See Qantas as an example where unions are demanding higher wages and benefits, even though the company made a $200 million loss on its international air routes.
5. Economic stimulus is only a temporary placebo as it increases debt or devalues currency. It is an artificial prop that eventually has a high price tag. It can also reduce whatever reserves there are and prepares the way for an even bigger problem next time round.
6. There is no gold standard to judge anything by and all currencies float against each other. This creates the opportunity for stock market manipulation and to trade in currencies merely for profit taking. It does not reflect the value of the currency, but merely creates the opportunity to ‘make’ money. Daily, $3 trillion is traded in Forex across the world. For everyone who makes money, someone else loses it and the exchanges are little more than giant casinos.
7. America’s debt alone will shortly exceed the annual GNP of the entire world!
8. One day the ‘Poor will inherit the Earth’, but as there is nothing left in it, they will remain poor.
A recent World Bank survey shows that 8 countries are in a critical debt/GDP ratio of over 90% and increasing. All are likely to be over the 100% mark within a year. These are France - 99%, Greece - 130%, Ireland – 93%, Italy – 119%, Japan – 204%, Portugal – 97%, UK – 94% and USA – 100%
Further, 20% of US debt is owned by Japan which itself has a debt ratio of 204% of GDP, so if the US defaults, that would flatten the Japanese economy.
The American debt ratio does not include its internal off-the-book bailouts to Freddie Mac and Fannie Mae of just over $5 trillion and the unfunded Medicare and Social Security obligations over the next 75 years which will exceed the tax revenue by $45.8 trillion. And recently their credit rating has been downgraded which means their interest payments will be higher and credit more difficult to come by. By 2060, US debt/GDP ratio is expected to reach 600% !
Certain agencies have indicated that under current law, sometime between 2030 and 2040, mandatory spending (primarily Social Security, Medicare, Medicaid, and interest on the national debt) will exceed tax revenue. In other words, all “discretionary” spending (e.g., defense, homeland security, law enforcement, education, etc.) will require borrowing and related deficit spending. These agencies have used such language as “unsustainable” and “train wreck” to describe such a future….Wikipedia
Now we add into the equation such little things as climate change and a burgeoning population that has just passed the 7 billion mark. Climate change has already seen the wiping out of agricultural crops over large parts of the world and with a couple of billion starving people on the move to greener pastures, what hope does the world have? Once a new financial world crisis hits, the sustenance that these starving nations depend on ceases. Countries that normally have surplus food go into recession and the source dries up. Farmers do not grow crops if they have no money and no credit and governments are bankrupt. In a depression farmers also go bankrupt.
These are the largest economies in the western world we are looking at. They are teetering on the very edge, and if they fall, the rest of the world will shortly follow. How long can they be propped up is a moot point. This is why the market is so nervous, but what actually happens if they DO fail?
I cannot see a way in which the world could recover from such a fall. Humpty Dumpty was never able to be reassembled, and I fear this is the same with the world as such. In the worst case scenario the picture conjured up is almost apocalyptic.
In the long term this could lead to something better, where the banks are divested of their power and all debt will have to be cancelled. Life will HAVE to start over afresh with new rules and principles based on supply and demand and with the abolition of credit and related debt. But that will mean a mammoth battle with diehards who will be determined to hang on to all their old advantages. It is possible, but a very difficult path to follow. Life will have to be on an actual sustainable level, and that is a lot lower standard than most Western people are used to. But then, the basic requirements and demands are always present and people need to eat, be clothed and sheltered and able to earn a living, so there is still a basis for a new economy. The greed that caused the current situation will have to be radically suppressed and lifestyles will need to be a lot simpler, and with a population now exceeding seven billion, it will be closer to subsistence levels, rather then luxury. But even that will require far-sighted and strong leadership to achieve it. Something along the lines of, “I can promise you nothing except blood, toil, sweat and tears.”
The alternative is total anarchy and chaos.