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The US as deadbeat: discuss

Stephanie Flanders | 18:04 UK time, Friday, 7 January 2011

Asked to name the biggest threat hanging over the global economy in 2011, most people will tell you it's the crisis in the Eurozone. Newsnight spent a lot of time debating its future only last night.

But since I'm moonlighting tonight as Newsnight's presenter, I decided we should also think about a more distant - but ultimately much larger - cloud on the global economic horizon. That is the possibility of a full-scale loss of confidence in US assets.

It's not an issue for the next few months, perhaps, especially with decent prospects for US growth in 2011. But both at the state and the federal level, America is awash with red ink, with debt rising "as far as the eye can see." Looking at these numbers, and America's dysfunctional politics, if investors ever started to question America's creditworthiness, or seriously sell the dollar, it could make the bailouts on the European periphery look like a tea party.

Ben Bernanke, the head of the US central bank got his first chance to address the New Republican congress today. He was cautiously optimistic about the US economy - too cautious for many in the markets - the dollar went down today on the back of his remarks, and some disappointingly weak new jobs figures. But this is what he had to say about the long-term threat posed by America's 1.4 trillion dollar federal budget deficit:

"It is widely understood that the federal government is on an unsustainable fiscal path. Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. "

If it were any other country, the ratings agencies would have got that downgrading pencils out for the US a long time ago. The US budget deficit last year was well over 10 per cent of GDP - and thanks to another round of tax cuts, it's going to be at least that high in 2011.

By contrast, the average deficit of the so-called "PIIGs" - the troubled Eurozone economies - was about 7.5 per cent of GDP.

Government debt is rising nearly everywhere, but the IMF forecasts that America's national debt will rise to more than 110 per cent of GDP by 2015 - compared to a developed country median of 81 per cent. And America is the only major economy to have just passes a fresh stimulus package for 2011 and 2012.

The new Republican congress has promised its 'tea party movement' followers that it will cut spending and "take back Washington". Republicans have already supported a new rule, whereby every spending increase has to be matched by a corresponding spending cut. That kind of mechanism has been successfully used in the past to keep a lid on deficits. But there's a big problem: on the new rule, tax cuts do not have to be paid for in the same way.

So, in the new Congress, taxes can go down - but they are extremely unlikely to go up. (Even though, as I've commented before - the IMF and others believe that the US is 'under-taxed'.) And, as the Economist pointed out last week , for all the talk of spending cuts - there is a zero support - in or outside Congress for cuts in the benefit programmes for retirees which take up an ever-larger share of the budget.

Though signs of faster growth have pushed up US bond yields in recent months, you have to say that investors have been remarkably calm about all this so far - for the usual reasons. The US is still the world's largest economy and the dollar is still the world's reserve currency. When it comes down to it, there aren't a lot of other places for investors to take their cash. But if the past few years have taught anything it is that once market doubts start to take hold, they can be very difficult to turn around.

Investors may spend much of 2011 watching Congress and the White House battle it out over the budget - with no agreement on any long-term strategy to cut borrowing. They may also shortly get a few frights at the state level, with serious questions now being raised about a California default or messy bailout, for example.

If any of that leads the financial markets to start questioning the creditworthiness of the US government - or the long-term value of the US currency - things in the global financial system could get quite ugly, quite fast.

Comments

Page 1 of 3

  • Comment number 1.

    So why should we think anything other than the USA economy and financial industry is headed nowhere but down. In addition to the enormous sovereign debt is the unstable private debt and as we have seen with the problem Euro nations it is the link between private and public debt can can be so toxic. not something we have seen much of but how can it be avoided in the next few months?

  • Comment number 2.

    But if investors do loose confidence in America and the US dollar, where do they flee? To the Euro, with its dysfunctional finances, or maybe the sclerotic Yen? The Swiss Franc couldn't accommodate such huge inflows, so what does that leave? Gold and silver; Heaven help us.

  • Comment number 3.

    If everyone sells dollars, what do they buy: Euros? Gold? Property? Shares?

    I guess the guys to watch are the Chinese - when they stop buying dollars then things will happen. Although realistically doesn't want to see a dollar collapse either (seeing as they own so many of the things) so maybe a managed fall led by the Chinese?

  • Comment number 4.

    SF: 'But since I'm moonlighting tonight as Newsnight's presenter, I decided we should also think about a more distant - but ultimately much larger - cloud on the global economic horizon. That is the possibility of a full-scale loss of confidence in US assets.'
    ------------------------------------------------------------------------
    Stephanie, I have a notion that the Fed made a big effort to identify as much as possible of the toxic debt and arranged for it to be sold off at 10 cents on the dollar to 'entrepreneurs' willing to take the risk. Is my memory correct or has this not happened or has the process has been bodged - a bit like European stress tests for banks?

    So, if the US financial system has cleared out the bad stuff, the only economic problems outsiders can be worried about are the usual ones that have been going on for over three decades. The three decades where the US carried big deficits but did as well as, if not better than, anyone else.

  • Comment number 5.

    2. At 7:32pm on 07 Jan 2011, zygote wrote:
    But if investors do loose confidence in America and the US dollar, where do they flee? To the Euro, with its dysfunctional finances, or maybe the sclerotic Yen? The Swiss Franc couldn't accommodate such huge inflows, so what does that leave? Gold and silver; Heaven help us.
    -----------------------------------------------------------------------
    Plenty of choice: Canadian dollar, Aussie dollar, South American currencies ... plus ... if outsiders really do like the look of the Coalition's measures and think they likely to work/are working ... the £.

    As a PS: Describing the Yen as sclerotic may be colourful as well as accurate but does the value of that currency really reflect the economic output of Japan over the last five years or so?

  • Comment number 6.

    Unlike the UK and the EU,the USA has persisted with a Keynesian style stimulus package in 2010.Growth prospects are promising and if sustained will reduce the deficit and create investment and employment.Similar measures in the UK during the crisis reduced the rise in unemployment and from the last quarter of 2009 has produced economic growth.However,the British economy has still not surpassed its GNP level prior to the crisis.

    With the USA,there are political barriers to further `New Deal` type policies.Equally fundamental are quesions of scale.Unemployment is persistently high and a drag on growth,an unknown quanta of toxic debt inhibits recovery.The question is whether enough has been done by way of stimulating investment and consumption to put economic recovery on an upward path? We don`t know,if the thirties are any guide, it took the war economy of 1940-45 to finally liquidate the great depression of the thirties.

  • Comment number 7.

    I hate saying this as I don't want to be right but there's a good chance that the period of 2010 to 2015 is going to be bad. If you consider the technology cycle which I think is around 40 years you get crash 1930, 1/2 crash 1970, crash 2010. Then if you take the Kondratieff cycle and adjust it for life span say 1930 + 80 or 85 years. Equals 2010 to 2015. I also read some articles on stock market fluctuations these point to 2000 to 2015 being a poor period overall. This is a mechanistic view I guess and really if you take a scientific approach you need to be able to identify form apparently random and conflicting information what's probably happening and the best solutions available. All complete nonsense of course but it appears to fit?

  • Comment number 8.

    leo tolstoy may have got it right !! big government oppresses !!!
    rampant capitalism with no check and support in this ( QE etc ) just
    delays the inevitable whilst the politicos bankers and media are in the
    same mode manana will go on i am buying yuan

  • Comment number 9.

    Overend, Gurney & Company (the Bankers' Banker) went bust in 1866 after a speculative bubble burst - however it is note worthy that the Long Depression did not start in the UK until 1873 (and lasted until 1896). The immediate reaction of the markets was to push up interest rates to 10% doing for a couple of hundred companies and other banks.

    Now what we have seen today is a deliberate efforts to keep money prices ultra low so that not too many banks go bust. There is a definite and obvious consequence of this policy however - duff banks are still trading - this however does make them anything but dead men walking. The banking and financial world is full of dead men - they cannot be salvaged as has been pointed out by others - even the Fed discounts their assets by up to 90%!

    So we now have a whole world of dead banks. The consequence of this is that these 'institutions', that are unable to free themselves from their un-repayable and non-performing debts, are preventing other new institutions from coming to market

    So we have zombie banks infesting the market and crippling the global economy's day-to-day business.

    They must be put out of their misery for everyone's benefit. The market did this in 1866 and the market should be allowed to do it today - interest rates must rise sharply to expunge the dead banks from the market so that we can get a real recovery. We must actively seek to deflate debt or the bubble will cripple the developed World for a generation.

    The Fed (and Bank of England) money pricing policy is wrong - they know it is wrong, but dare not say so!!!!

  • Comment number 10.

    "if investors ever started to question America's creditworthiness, or seriously sell the dollar, it could make the bailouts on the European periphery look like a tea party"

    Good article and loved the references to another tea party - very clever.

  • Comment number 11.

    As the article in today's Le Monde explains, the Chinese are voting for the euro. That's bad news for the green buck, for the Chinese have $2.6tn of them, and they are beginning to dump.

  • Comment number 12.

    #4 Up2snuff,

    As far as I am aware the promise to sell-off toxic debt has been as well enforced as the BoE promise to buy "quality commercial papaer" with QE. The majority of it is still there but is now buried more deeply thanks to the 2008/9 accounting rule provisions - you know the one whereby you can value whatever is impossible to sell at any price that suits your own interests!

  • Comment number 13.

    The USA does not have a sovereign debt crisis. Interest rates on government bonds are at ALL-TIME LOWS. Why do the media keep bringing this non-existent crisis up?

    The real and obvious US crisis is mass unemployment, weak growth, falling inflation and an overvalued dollar.

    The USA can not be compared to the PIIGS. The USA has the Fed, which cares about the people of the USA. The PIIGS have the ECB, which doesn't give a damn about southern europeans and in thrall to German inflation paranoia.

  • Comment number 14.

    There is a new Republican Congress?

    Are those are the same guys that allowed the toxic debts via their 'ssshareholdings' in the banks and their chums that caused the problems that we are now in?

    The same guys that ran the banks that tax-payers bailed out on loan, but no pay back yet? Wow - nothing like a government lawyer drawing up a tax-payer loan to bankers who are running the planet?

    The same guys that live in a daily stratosphere beyond belief in a private club of world leaders on banker's private islands? Are you getting the picture?

  • Comment number 15.

    Will be mildly content if my post on corrupt bankers and government involvement of tax-payers money gets through?

  • Comment number 16.

    You have to love the Neo-Keynesians. Apparently the government should be running deficits to keep the "recovery" going, and even bigger deficits during times of crisis. Didn't Keynes require that government run surpluses during the good times to pay for the bad? Since there isn't a recession at the moment, it presumably qualifies as "good times". Personally I think the Keynesian view was already discredited during the 1970s, when the best it could achieve was stagflation.

  • Comment number 17.

    Anyone who spends more than they earn year after year will go bust, whether they're a person, a company or a nation. We have to learn to live within our means. We've had a 'have now, pay - err, sometime, maybe' culture for too long. If we don't pay our bills, our children will have to.

  • Comment number 18.

    #11 >>That's bad news for the green buck, for the Chinese have $2.6tn of them, and they are beginning to dump.

    FYI, at their last announcement, the Chinese said they hold "only" US$800 billion ! They hold the rest of the $2.7 trillion in other currencies *AND* in gold !! Now that they have decided to support the PIIGS' debt position, I wonder what they will sell to buy their Euro-denominated bonds ??

  • Comment number 19.

    #9 JfH>> Absolutely correct !! Get rid of the duff banks and things *might* be a bit easier to deal with !!

    Bernanke was warned not to play fast and loose with the value of the US$ by simply printing more of them (i.e. Quantitative Easing) !! He went ahead anyway and, now, he is trying to sweet talk the Americans to accept the blow that is coming - a loss of faith and trust in the US$ !!

    Some, here, have asked - if not the US$, what else should someone invest in ?? The short answer is - the Euro !! With Chinese backing, it's not going to collapse in the near future and since the ECB prevents simply printing more paper to "Get out of jail free", it looks like a good bet for the near future.

    "But why not the Yuan" ?? Well, the Yuan is strictly controlled and they already fear a massive influx of flight capital upsetting their economy and pushing inflation through the roof !!

    If anyone wants to look further, please ask someone who owns a crystal ball !! Unfortunately, I don't have one !!

  • Comment number 20.

    "And America is the only major economy to have just passes a fresh stimulus package for 2011 and 2012"

    Why do financial journalist always forget Japan when discussing things? It's like it did not exist. Just the world's 3rd largest economy! It has recently passed new stimulus measures and those high debt levels do not seem to bother them at all.

    Btw, world's 2nd largest economy avoided recession by having a stimulus worth 17%(!) of GDP: http://www.youtube.com/watch?v=JS-RXZk6Z2Q

    "Though signs of faster growth have pushed up US bond yields in recent months, you have to say that investors have been remarkably calm about all this so far - for the usual reasons. The US is still the world's largest economy and the dollar is still the world's reserve currency. When it comes down to it, there aren't a lot of other places for investors to take their cash. But if the past few years have taught anything it is that once market doubts start to take hold, they can be very difficult to turn around."

    You think, you really think that US government is at the mercy of the investors? Read the US constitution. It clearly states that US congress has the power to issue money. This is does every time it spends. US government issues new money and government bonds at the same time. Deficits are self-financing! This is how it works in every proper monetary arrangement. Eurozone has clearly some serious structural flaws, it is not just being reported as such!

  • Comment number 21.

    9, John_from_Hendon

    ' interest rates must rise sharply to expunge the dead banks from the market'

    Dry your eyes.

  • Comment number 22.

    It’s good to see that the solvency of the US economy is finally being discussed in the mainstream media. They are a bankrupt nation and have no way out. Stephanie is only using the official debt figures, these don't take into account the trillions of $ worth of off-budget debt such as medicare and medicade not included in the official debt figure!

    Those who say don't worry they can issue / print money, investors will stop buying US debt (already taking place, the fed has been buying bonds with its make believe money) and if they continue "printing" money to pay for their debts they will inevitably cause hyperinflation. History has provided recent examples of Germany in the 1930's or current day Zimbabwe or South American countries in 1990's. The only thing the US has going for it is at the moment it is the world’s reserve currency - but this will not last for long. China has been dumping the dollar for a few years now, preferring the Euro and gold along with any raw material it can find.

    The main event in 2011 will be when many US states declare bankruptcy. The city of Prichard will be the example they will follow. That US city declared bankruptcy and stopped paying its pension as it ran out of cash. California is facing $19bn deficit, New Jersey has a $100bn deficit in its pension along with others like Iowa and New York. Illinois is spending twice as much as it gets in taxes! Once these states go bust the US should be exposed as bankrupt and the dollar replaced as global reserve.

    And as for Japan, they have debt at 200% GDP and are paying almost 60% of their taxes on just the debt interest! All the Japanese savers who have been lending to the government will find when they retire that their investment will have not be worth much.

  • Comment number 23.

    There isn't enough oil in the world to support growth in the West and in China. As soon as both economies show the slightest hint of being ok, the oil price sky rockets. Ditto food, ditto copper, ditto everything. Last time that happened (2008) it was followed by a banking crisis. When oil reaches $147 per barrel, expect everything to go wrong (again).

    But this time it won't only be the private institutions that will come under pressure; the bank bailouts were a massive transfer of liability from bank shareholders to our governments.

    What Rob_Hampshire says is true. If you spend more than you earn, someone at some point will have to pay for it. The transfer of liability offered hope that the markets would allow governments enough long term credit that they'd be able to spread the pain over time. Not water into wine, but a heart attack into gallstones.

    Ireland and Greece have already found out that this assumption was incorrect for them, with even moderately high oil prices. Are the oil markets and the bond markets stupid enough to keep pushing until they break something that breaks them, again? I'm beginning to develop a strong faith in the stupidity of the markets.

    This is a good read: http://zoniereport.com/?p=1735

  • Comment number 24.

    This notion that "government is running out of money" is biggest hoax of our lifetimes. Anyone interested in these issues should watch this documentary to understand even the basics of our monetary system: Money As Debt II - http://vimeo.com/6822294

  • Comment number 25.

    zfvr, if your dogma is correct why do the GOP care so much about what the government spends? If they can just print new money and spend it without that having an inflationary, or any other, effect then surely the US is some kind of economic shangri-la?

    In a world where there is a single "reserve currency" and you are "it" you can get away with running unsustainable deficits as there will always be buyers for the debt. However the concept of a single reserve is looking increasingly antiquated in the modern world where US economic dominance is rapidly waning. The consequences of losing this status would be dire.

    BTW the constitution may give them the power to print money but it does not endow them with the ability to create wealth.

  • Comment number 26.

    First, let's clear up one thing. A jobless recovery is a misnomer.
    With as many people out of work unaccounted for, a so-called jobless recovery is a laughable term.
    Second, it is always about the money. Anyone that lives or has traveled to America will confirm one observation; our infrastructure is on the brink of collapse. With the money needed to repair and replace the myriad problems facing municipalities, obtaining that money through more bond issues is futile. Why? Watch what happens when the defaults start. Nobody wants to be left holding the bag (bondholders) for projects that will never be completed.
    Third, the downward pressure on real wages is a force directly applied from businesses. A global marketplace is quickly forcing American workers to work for ever diminishing wages to compete with foreign competitors.
    Fourth, the lower wages paid by American workers will result in less tax revenue. Shrill cries from American business owners notwithstanding, the loopholes in the current tax code place the onus of the tax burden on the American worker.
    Finally, this means that the American worker is unable to pay the interest rates based upon a standard of living that is nonexistent. In other words, American debt is junk. Until wealthy Americans share in the tax burden, bonds are worthless. Income disparity will guarantee it.

  • Comment number 27.

    #24 >>This notion that "government is running out of money" is biggest hoax of our lifetimes. Anyone interested in these issues should watch this documentary to understand even the basics of our monetary system: Money As Debt II - http://vimeo.com/6822294

    It's not running out of paper money that's the problem !! It's running out of assets to back up the paper they print that's the problem !! Zimbabwe has lots of money and it is rumoured to cost 1000 trillion Zimbabwean dollars to buy a loaf of bread !!

    Plenty of paper, plenty of debts, no value or assets to back them up !!

  • Comment number 28.

    Barry Thompson writes: "The USA has the Fed, which cares about the people of the USA."

    Which ones?

  • Comment number 29.

    #21. JavaMan wrote:

    "29, John_from_Hendon

    ' interest rates must rise sharply to expunge the dead banks from the market'

    Dry your eyes."

    I haven't a clue what you three work contribution is about.

    If you genuinely do not understand that the interest rate regime that the idiots are currently running is aberrant and completely at variance with the needs of the world's economy as shown in the last 300 odd years of development that you simply can't do sums!

    Let me try to explain in very short words:

    Normal economics interest rates go: "savings rate" less than "base rate" less than "borrowing rate"

    Insane economics (current) interest rates go: "base rate" less than "savings rate" less than "borrowing rate"

    (Read the last two paragraphs out loud slowly with particular emphasis on the order of the items in quotes.)

    Surely even you can now see that the Fools of Threadnnedle Street (and the Fed) are entirely wrong in the management of the pricing of money. The real market "base rate" is currently of the order of 3% not the entirely fictitious 0.5%. The idiots have lost all credibility and control which is a desperately bad thing and bodes only disaster and a very Long Depression. They all need sacking NOW (as they are the same idiots that failed to price money correctly that caused the bubble economy that gave use the crash and the collapse of the banks.) These dead men walking banks need removing from the market as they are totally corrupting the money market and preventing and form of genuine economic activity resuming.

  • Comment number 30.

    . At 00:26am on 08 Jan 2011, segron wrote:
    "You have to love the Neo-Keynesians. Apparently the government should be running deficits to keep the "recovery" going, and even bigger deficits during times of crisis. Didn't Keynes require that government run surpluses during the good times to pay for the bad? Since there isn't a recession at the moment, it presumably qualifies as "good times". Personally I think the Keynesian view was already discredited during the 1970s, when the best it could achieve was stagflation."

    A common misunderstanding,Keynesian pump priming is sometimes called deficit financing.Government`s incur debt to stimulate consumption and investment.The multiplier effect means that the value of the increase in output and employment exceeds the original investment and tax revenues increase to pay for it and hopefully generate a surplus.

    Producing a surplus during "The good times" supposes that government`s have no other objectives than stabilizing capitalist economies.Then there is a question of timing,knowing when the crisis will strike is like the story of Louis B.Mayer`s nephew,employed on the top floor of the Hollywood studio to warn when the next ice age appeared.

  • Comment number 31.

    John from Hendon, the "fools of threadneedle street" are not wrong, they just have a different aim to that you think they have (and, to be fair, they publicly state).

    As Steph has pointed out at length, if their real aim is to control inflation they have been incredibly bad at it for the last three years but have not taken any corrective action whatsoever. This leads one to suspect that perhaps they're actually not all that worried about inflation after all.

    I think the housing minister let slip the real policy a few days ago when he explained that house prices must continue to rise but just by less than wages rises ie they will be reduced by letting them fall behind inflation (What he didn't explain was how this would work now that wages are falling or how this helped someone close the 10 times multiple between their income and an average house).

    Moderate inflation would in fact seem to be the real aim of current monetary policy and it's easy to see why: done "right" it will help depress asset and debt values without the actual prices going down (no administration wants to be the one remembered for falling house prices) and the only real losers will be those pesky savers who are keeping money out of the system where it can't be taxed.

  • Comment number 32.

    29. At 08:49am on 08 Jan 2011, John_from_Hendon

    I understand perfectly well what has happened here. You have been on here for some time now bleating about rising interest rates sharply (I assume for purely personal reasons), no thought whatsoever of young families with children being evicted from homes.

    Your ilk (The greedy banking cartel) have created this mess, now, because of your perception that you are losing money due to (REAL terms high inflation) versus (low interest rates on savings or other investment types), you feel its better for those kids to take the hit to protect the 'John's from Hendon' in this world?

    I fully accept that the economic model is broken however, we are where we are and that means yanking back the interest rate lever is the WRONG thing to do in these circumstances.

    Personal debt is HIGH
    Income Tax (including indirect taxes) is crucifying people
    Jobs are less stable
    Unemployment is rising

    And John wants to Raise interest rates? I would love to see the tories try it, I think all hell would break loose. For the record, in all my 40 years I've never voted once (And my actions are fully vindicated) Democracy? Don't make me laugh!

    And as for SF blog, I think that there is a real possibility the US government debt will become unwanted, can you blame those investors? All we need is a printing press of our own.

  • Comment number 33.

    31,

    The government are stoking inflation by means of their policies, they then intend to use the manufactured inflation to increase the price of debt.

    This cannot work and will end in an economic meltdown.

  • Comment number 34.

    "For the record, in all my 40 years I've never voted once (And my actions are fully vindicated) Democracy? Don't make me laugh!"

    How can you be vindicated? Not voting isn't an action, it is an abdication of responsibility.

  • Comment number 35.

    In the end, you can't solve a debt crisis with more debt. Governments and their central banks are doing thier best to 'kick the can along the road' because the alternative is unacceptable in social terms today. Trouble is, it will be a very long road, and these days we are all used to instant answers. History tells us that quick euphoria that we have saved the world and all will be OK, as seen in the rampant equity bull market of the past 18 months, is followed perhaps 2-4 years later by a dawning that there is no easy escape - witness 1929-34 or the early 1970s. A stampede will follow as everyone tries to get out. Sad thing is, well intentioned governments are causing the next bust with life support interest rates that are sucking vulnerable savers into equities. 2007-2009 hit the greedy, the forthcoming reckoning will hit the old and those who have quietly saved while others lived beyond their means. The only question is the timing.

  • Comment number 36.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 37.

    Any heavy selling of US debt will be speculative, because as several contributors have pointed out there is really no where else for them to put their dollars long or medium term. Sellers will be hoping to buy back US bonds at a reduced price.

    The FED should simply let it be known that it would punish any such speculation by heavy buying, making it expensive for speculators to unwind their positions.

  • Comment number 38.

    Paul Krugman blog 8 December 2010: "US long-term interest rates have risen somewhat in the wake of the debt deal — and sure enough, we’re hearing warnings about “bond vigilantes” again. OK, guys, first of all: interest rates have soared back to their levels of...June. Beyond that, it has been very clear, if you watch the ups and downs of long-term rates, that they reflect just one thing: perceived prospects for recovery, and hence when you might expect the Fed to move off the zero-rate policy. Rates began rising a few weeks ago as data began to suggest a somewhat stronger recovery than previously anticipated (stronger, not strong — we’re still looking at years of very high unemployment). They rose again in the past couple of days on the belief that the stimulus part of the tax deal would actually lift the economy to some extent.
    What is true is that perpetuating the Bush tax cuts raises the probability of a fiscal crisis somewhere down the line; it’s very different from short-term stimulus spending, because it raises the prospect of a permanent worsening of the outlook. But that’s not what is moving markets now."

  • Comment number 39.

    Paul Krugman blog 22 August 2010: "One thing you sometimes hear is that the game will be up when the ratings agencies downgrade U.S. debt. I wonder how many of the people saying this know that Moody’s and S&P downgraded Japanese debt in 2002, with Moody’s actually putting it below Botswana and Estonia. And 8 years later, Japan can still borrow at less than 1 percent."

  • Comment number 40.

    13. At 11:52pm on 07 Jan 2011, Barry Thompson wrote:

    The USA can not be compared to the PIIGS. The USA has the Fed, which cares about the people of the USA.

    --------------------------------------------------------------------------
    The FED cares about Wall Street only and only the Banks have benefited from all the new money. The Banks were insolvent in 2008, most of them still are but the FEDS myriad of schemes has artificially kept them afloat. However that is all about to topple as Forecloseure Gate has taken a new turn with two banks losing their cases for the right to foreclose.

    http://www.bbc.co.uk/news/business-12140877

    This now sets the precedent for tens of thousands of cases currently going through foreclosure but more worryingly for the banks the judge ruled this case is retroactive. This will cost the banks even more money fighting previous cases but it also drags into the quagmire all the NEW homeowners who bought foreclosed homes from banks who had no legal right to the property.

    For each previous case proved against the banks where the property has already been sold on a new family will be thrown on the street. The banks will be expected to reimburse all the new mortgage payments and cancel the mortgage but what about the family who are now homeless? Will the banks pay for them to stay in a hotel until they find another home? How long will it take to find another home if so many title deeds are suspect? New builds will be the safest option but during the worst recession since the 30's how many were built? Will the bank be liable for compensation, what is the financial cost of being made homeless and the stress it causes?

    This is trillions of dollars worth of assets that are all now suspect. Is this the first domino of the collapse of the US economy? One things for sure 2011 is going to be a very interesting year.

  • Comment number 41.

    So other countuires have defaulted before and are now OK.

    Stephanie, would you explain what actually would happen if the US defaulted? Would other countries suffer more than the US?

  • Comment number 42.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 43.

    I can see that the Swissfranc/eu competitive discrepancy is starting to make itself felt in businesses by rising unemployment already very low but it rising. Sterling to Franc xchange is a rotton low.
    The Swiss National bank is under pressure to do something, perhaps to devalue the safehaven Sfr, this surely would send signals that gold will become even more hopelessly overvalued, can we expect a tumble in value of both and who's going to be the looser ?

  • Comment number 44.

    a way to look at this we have a series of islands, usa on the highest ground biggest island the water level is rising and some are near drowning all are producing water into the sea a flood is coming each island has an economy thats ruuning a pump to keep it dry.
    its a bit like global warming the highest producer doesnt care greed overcomes reason
    most pumps have failed but all the islands have taken on usa money to power their pumps as their savings. mess up usa economy ther drown first, the usa uses this to pay its way they are too powerfull to fall.

  • Comment number 45.

    Current deficits of national governments is the latest fashion in economics. That doesn't mean they're unimportant but we need to be more practical.
    Once the preoccupation was the ecahnge rate, then the balance of payments, then low productivity, then high unemployment, then inflation. Worrying abour the size of the deficit is just the latest 'crisis' that commentators get worked up about.
    US taxpayers have huge assets and massive cash-flows: that's not going to go away.
    In 1997-98 the UK government was paying 5.2% of our entire national income on its debts. Then the incoming government paid it down - to choruses of disapproval from the usual suspects - and we now pay about 3% of national income.
    Likewise the US economy was written off in the 1970s as in decline. It wasn't.
    Look beyond the fads of economic commentators and thioer invented crises!

  • Comment number 46.

    12. At 11:30pm on 07 Jan 2011, foredeckdave wrote:
    #4 Up2snuff,

    As far as I am aware the promise to sell-off toxic debt has been as well enforced as the BoE promise to buy "quality commercial papaer" with QE. The majority of it is still there but is now buried more deeply thanks to the 2008/9 accounting rule provisions - you know the one whereby you can value whatever is impossible to sell at any price that suits your own interests!
    ----------------------------------------------------------------------
    Oh woe! Thrice .. etc. As Zygote ended #2, 'Heaven help us.'

    We really do need the central banks - and auditors - especially in the UK and US and EU to be on the top of their game right now. But the contrast with 1972-74 is starting to become alarming.

    Steffie suggested previously that Indonesia might become a future major economic player. But I would have thought with their population level and oil & gas as they are, that they are pretty much there already. It is not hard to envisage an arc of future prosperity sweeping across the ASEAN countries and across to Latin America and up to the Caribbean, leaving out China, India and, most of all, the northern hemisphere. Australasia would sit on the edge and benefit from it too. The Canadians would probably be OK but Europe would be left to huddle together with the US and Russia for warmth. Possibly, for exactly that.

    A good reason for ending conflict encircling the Caspian, as we have discussed previously?

    But back to dodgy paper in the US. The deal that Bush proposed and Obama appeared to take on, seemed to be a bargain for brave, rich people. I previously used the phrase ten cents on the dollar but, if I recall correctly, the plan proposed at the time was even more generous than that. And amongst the assets covered by the soubriquet 'dodgy paper' may have been enough good stuff to give investors a medium term return (5-15 years) of forty, fifty per cent or more. On book values of millions of dollars?

    So, if that offer has not been taken up at all, what is the point of keeping interest rates at almost zero?

  • Comment number 47.

    re #31 Good post. But two different Parties' Governments have had house prices fall, so has that not taken the sting out of that particular stigma?

    The Coalition bringing house prices down would unfavourably excite the Daily Express, Daily Mail and Daily Mailograph leader writers but could be presented by Government in the present climate as something of an achievement.

    The best way to do it would be to build more houses as well as raising interest rates to realistic levels. There is a pension crisis getting bigger by the day. Low interest rates do not help, other than providing short-term support to the Stock Market.

  • Comment number 48.

    Hi Stephanie

    Thought you looked "great?" on newsnight last night. Think I followed what you were saying?

    Anyway look forward to seeing you more. Its your style or something. Terrible news coveyed in a relaxed style.

    Somehow I like it. Am I normal? What is normal? Please can you do a story on this newsnight?

  • Comment number 49.

    The biggest economic threat to the entire globe is the United States of America.
    In effect, the Fed is telling the markets not to worry about American fiscal deficits; it will always be the buyer of first and perhaps last resort. One has to ask oneselef: Has there ever been such a big, brazen Ponzi scheme?
    In November, Bernanke announced that it's ready to resume money printing to stimulate the economy through quantitative money easing, an euphemism for print-print-printing more money. It will
    - buy $600-billion of longer-term Treasury securities
    - plus @ $300 billion of reinvestments, plus
    - $1.75 trillion of various types of securities (most of which were mortgage-related securities. This figure really stands at 2.5trillion).
    Think about this: post election, November 2nd, what other recourse do the Americans have EXCEPT to print money to stimulate the economy. However, consciously, purposefully debasing your own currency to stimulate an economy used to be a totally Third-World economic tractic...and a toxic recipe for disaster.
    The US economic problems are essentially structural; they are due to a bad
    - housing mortgage policy,
    - industrial policy,
    - financial policy,
    - fiscal policy,
    - foreign investment policy,
    - severe demographic problems related to the aging baby-boomers, but mostly to
    - very expensive wars abroad.
    The Americans seem to lack imagination. In fact, printing money is extremely likley to exacerbate rather than correct problems.
    Economic structural problems cannot be corrected with paper.
    These require real structural change - the housing mortgage boondongle, the industrial strategy, the fiscal strategy, etc.
    The Key problem:
    For the time in history, American bankers, numbering about 9, are running the US economy. The irrationality of this is that these same investment bankers CREATED most of the problems.
    The Fed has a long history of creating financial bubbles in the US and around the world, essentially because the US dollar is an international key-currency widely used around the world and is an important part of other central banks' official reserves. Thus, the danger: The Fed will create unmanageable financial and monetary bubbles in the coming years. We saw this in early 2000s, when easy Fed money helped inflate the housing bubble. It's good financial principle not to have one's central bank controlling the monetary brakes or the accelarator becuase this sets up boom-bust. All of these bubbles are interrelated but when they come crashing down, four or five years hence (maybe sooner) the economy will be worse off than it is today, and that is economically mindboggling.
    The current Fed's monetary policy is to flood financial markets with liquidity; this means newly created dollars; in the process, devalue the US dollar, which (the Fed believes) will spur American exports and prevent deflation from taking hold and from making already high debt loads higher. For this, the Fed has been engaged since 2009 in
    - money creation
    - interest rate reductions and
    - keeping short-term real rates negative.
    But to demonstrate how uncreative (dumb) this is a central bank policy is, it is UNLIKELY to stimulate the real economy. In fact, it can far more likely become disastrous.
    Therefore, if the Fed's intention teet towards printing large amounts of new money, they will totter into massive inflation, higher long term interest rates, and a rating that I would give of ZZZZ.
    Oh and then there is this consequence:
    The current outflow of US dollars helps keep the dollar exchange rate low, but when the Fed is inevitably forced to aggressively raise interest rates, the reverse will happen: The US dollar will likely become overvalued. Witness the Japanese yen which became unduly strong.
    The Fed’s zero-interest rate policy has not cured the structural housing mortgage crisis; home foreclosures remain too high. The Fed are now leaning towards currency devaluation. This is a form of protectionism. The Fed is betting that countries will not retaliate, and that the international dollar-based currency system will remain intact.
    Fools!
    Sooner or later, some central banks around the world will have no choice but to impose capital controls in order to slow down the inflow of unwanted (i.e. American) money and the imported inflation which goes with it.
    Meanwhile, foreign central banks, could accelerate their rush to DUMP the US dollar and to accumulate gold and/or more stable currencies such as the euro, the Swiss franc, the British pound, the BRIC basket, the Canadian dollar, the Australian dollar...
    CHINA HAS ALREADY BEGUN TO DO THIS. This may trigger the end of the “imperial dollar” which has dominated the international monetary system since the Bretton Woods, 1944.

  • Comment number 50.

    A new ''supranational/world/global currency''.

    I can feel it coming, groundwork starting, 18 Sept. 2012.

  • Comment number 51.

    Looking at the reports today of the banks failing in the courts to foreclose on bad house loans is a real concern for the US economy.

    If the banks have been shown that they do not have the paperwork to prove that they owned the house and therefore can not foreclose on it then do they have the ability to package up all these loans to sell on - which was the cause of the global financial crisis.

    Which of the banks - and governments -is going to declare the deals null and void and ask for the money back from the American banks who bundled up these deals?

    The moment one goes for it and the arguments are accepted in the courts that the bundles were sold illegally then that bail out deal of 10 cents on the dollar is going to seem like a mightily overpriced scam.

    Stand by for financial collapse part 2. As the UK banks are now having to find money to repay the initial bailout of two years ago, one may just take the option of trying to get their money back.

  • Comment number 52.

    If JfH is right about the price of money and the fools keeping Base rates at 0.5% for nearly 2 years etc etc...... then we are all in a lot of trouble, because the BoE/MPC policy is about the survival of the banks.

    If JfH is wrong then we are all in a lot of trouble because the low Base rate has neither stimulated the economy nor controlled inflation.

    Either way, such a low level for so long (Plus QE) indicates that there's something seriously broken in the money transmission system - probably permanently.

    FWIW I think JfH is right

  • Comment number 53.

    #32. JavaMan wrote:

    "(I assume for purely personal reasons)"

    Nothing of the sort interest rates are already at 3% as I have shown above - it make no difference to me what interest rates are at just as it makes essentially no difference to most people - except those who are 'the problem'. The whole global financial system is dependent on the totally imprudent and this will without a shadow of a doubt crucify all of us for a generation. You have obviously not understood anything that has been written by me and many others about a rational pricing of money and its crucial importance fro a sound(ish) economic system.

    With a rational positive price fro money none of the fiscal or macroeconomic levers work and the economy will remain in free-fall. Is that what you want if so please read up on the Weimar Republic as it will come in handy when you and the rest of us are resorting to a barter system when money has collapsed entirely. This is the very real cataclysm on whose rim we are perched and because of the idiots in charge blindfold with their fingers in their ears.

    I gather that your response indicates that you are part of the problem (see above) my view is that it is better to bail out at whatever price you can get today as things can only get worse for you. If you have been so imprudent that you are over-borrowed there is no financial solution or hope for you at all. Reorganise your finance while you still can and before the matter is taken out of your hands.

    As to your comments about my world - that is I guess the World of the financially prudent - history shows us that those in my world are the survivors and that those in yours are doomed.

    Interest rates need to rise NOW up to at least the market effective rate of 3% and then progressively upwards to at least 5% if there is any delay inflation will get a firm hold and rates may have to rise to perhaps double that - this is the lesson of history. If your finances are so badly structured that you are barely keeping your head above water now - you are without doubt probably doomed!

  • Comment number 54.

    With oil pegged to the dollar (unfairly), any corrective actions in the world economy will be disproportionate to non US economies.

    Are we all in this together?

  • Comment number 55.

    Well, well John from Hendon, no one can see from which part of the fence you are from! But, I feel you need a basic lesson in not only economics but capitalism. If you beleive in the free market version of capitalism, you have some pretty nasty shocks coming down the road for you obviously pleseantly comfortable existence. In a free market, evrything has a price including wages. Don't forget that to pay for your lifestyle, someone somewhere has to do real work for very low wages in order to finance lifestyles further up the food chain.
    In the future (and to a certain extent it is happening now) those at the bottom of the food chain are realising that they are and been taken for a ride by those at the top and they are not going to remain subservient for ever. As for capital values, if those values were honest, then commodities, capital, bonds, property and the exchange markets are vastly overpriced and have been for the last 10 - 15 years if not longer.
    For governments and global countries to talk about growth, is nonsense, any so called growth is based on flawed perception and even worse on manipulated mathematics. In real terms using real value assumptions, growth is negative and real values are negative. This is not only caused by inflation and inflated growth costs but is the result of both global businesses and governments manipulating their economies to suit ntheir own business or political ends. Governments at one time accepted that a level of inflation was more acceptable than dealing with "government cashflow" because in the midterm servicing debt became cheaper as inflation reduced the amount of "real money" to pay down the debt. The spin off from this was of course that housing was tied to this financial policy and as a consequence the value of bricks and mortar was perceived to rise. The only winners in this part of the market were those who owned their property outright or with a very low mortgage and used the increased equity to pay off the debt and sell up and downsize without a mortgage. The other winners were those who borrowed less than 40% of the lowest valuation of property and were buy to let owners who paid the mortgage and outgoings on the property and were left with an a comfortable income after tax.

    Now the only winners are those with no mortgage and who's ownership of the property is longer than 15 years.

    So John, you want to increase interest rates so that you and others of you ilk can get an increased return on your investments; but why should you be entitled to a return when those that actually work to produce profits for you have to pay to service bank debt brought about by rapacious investors who unwisely invested in financial products which turned out to be junk paper? Personally I think that you'r lucky that the rest of the taxpayers bailed out the banks otherwise you would not perhaps be in the position you are today.
    Regarding the financial state of the US, the US economy is basically geared to producing high tech war material of which some is sold or given away to Israel, Saudi Arabi and other countries that the US State Department wishes to influence. The US government is getting to the stage were it desperately needs to start a war either with Iran or somewhere else. As regards the US dollarlosing its influence, tthe sooner the better: why shoild free nations have to purchase oil, certain chemicals and aircraft in US dollars? All this does is benefit the US economy to the detriment of the rest of the world.

  • Comment number 56.

    segron wrote:
    "You have to love the Neo-Keynesians. Apparently the government should be running deficits to keep the "recovery" going, and even bigger deficits during times of crisis. Didn't Keynes require that government run surpluses during the good times to pay for the bad? Since there isn't a recession at the moment, it presumably qualifies as "good times". Personally I think the Keynesian view was already discredited during the 1970s, when the best it could achieve was stagflation."

    Thanks, segron. I agree 100%. I would make one suggestion. Because they omit the countercyclical aspect of Keynes' idea, i.e. they approve the borrowing but not the payback, "Pseudo-Keynesian" is a better descriptive term than the one you used.

  • Comment number 57.

    45. Leftie.. In 1997-98 the UK government was paying 5.2% of our entire national income on its debts. Then the incoming government paid it down - to choruses of disapproval from the usual suspects - and we now pay about 3% of national income.

    Have you not counted how many more doctors, nurses and teachers we now have since 1997? We will soon be back to the 5.2%... so are you happy for all these state employees to loose their jobs? As the extra interest payments on the debt eat into the same pot of money. I don't understand why it is so hard for the lefties to understand the implications of the debt trajectory we are on.

  • Comment number 58.

    The biggest threat is weak demand, the deficit is merely a symptom of this.

    With upwards of 10% real unemployment and large capacity gaps this is the real problem.

    The public debt is merely private savings.

    From 1749 to 1849 and much of the 20thC the UK had over 100% Debt/GNP ratios, this was a significant driver of the Industrial Revolution and continued subsequent growth.

    Comparing the US/UK with Greece, Ireland or Belgium France and Germany is ridiculous as they aren't monopoly currency suppliers! This is basic Soft Currency Economics or Modern Monetary Theory aka Central Bank Operational Reality...government cheques don't bounce they simply create money, just as taxes destroy money.

    Job seekers are paid equivalent to 11 hours at minimum wage to do nothing, surely it would be better to say they should do that much community service?

    Better still, offer them the option of up to 40 hours a week and increase the minimum wage to a decent living level of say £9 in London, £8 in the southeast and £7 elsewhere.

    I suspect this would help encourage many people on welfare, disability or not even looking for work, to get back into the discipline of working life.

    It's called a Job Guarantee like in Norway from 2005 onwards for those up to 24 or out of work for over 26 weeks.

  • Comment number 59.

    John_from_Hendon's 'solution' is a twenty plus year depression?

  • Comment number 60.

    Bob Matthews:
    "Don't forget that to pay for your lifestyle, someone somewhere has to do real work for very low wages in order to finance lifestyles further up the food chain."

    This is why we would be in for a rude awakening if we got rid of The City. The City skims real value off real workers all over the world. This makes a lot of money and this generates a lot of tax, which helps us all get obese in the UK whilst pushing pointless bits of paper around under a government whose spending accounts for 50% of GDP.

    I don't like any of that last paragraph and I'd rather we earned our way in the world like Germany, but we don't. I don't think most people in the UK understand why our quality of life is so much higher than people in "lesser" countries. I think they just think we are smarter and work harder and that's that. I think other countries are getting wise to this but sadly our own population has no idea. I suppose the core population don't need to, just as most American's are ignorant of the outside world.

    I think this model works well very well until it starts to break down. In the interim the population are obedient and watch Eastenders. No problematic questions etc. However, when it does start to break, the core, who were not told the rules of the game, stamp their feet because they cannot afford holidays or bigger TVs. This will make managing down expectations very difficult, perhaps causing unrest and the election of another unsustainable government.

  • Comment number 61.

    The USA is fine ... once they get rid of Obama and get a national strategy in order (fuel.. energy, trade, defense)... the USA will move ahead of all and sundry.

    If there is a better reserve currency than the dollar ... where is it?

    When the tipping point is reached the USA will to do what it has to do in terms of policy/strategy ... and the UK will follow as the USA is still more of a strategic influence on the UK and its economy than the EU.

    The US dollar and US assets are safe while oil is still measured in dollars and the Chinese value US dollars as otherwise the Chinese will be a lot poorer also (i.e. for their selling in in their own de-based currency but buying with US dollars).

    I expect the US to put raise its own import/export tariffs in the years ahead so as to stimulate its domestic economy /jobs in vital sectors... and move away from fossil fuel. The UK may follow probably after the UK economy crashes further in the coming years.

    A scaremongering story with little basis ... we forget that that most US politicians do not suffer from 'frightened rabbit syndrome' as is the case, in the UK, with our own politicians.

    Next blog please ... the big story is the lack of re balancing action in the UK economy.


  • Comment number 62.

    58 RNG - how about abolishing the minimum wage and time limiting benefits to allow people to earn money?

  • Comment number 63.

    @58
    The biggest threat is the men in grey suits.
    These guys have really screwed things up over many years. JfH continually points out that the same grey suits are still screwing things up. By any measure - count dead US banks, count the trillions or count the letters Mervyn writes - it's a total disaster.

    I don't know what the Base rate should be; but in 300 years it has never been below 2% until now. That indicates just how bad things are. Bank rate at 0.5% for nearly 2 years should have sparked the biggest lending boom in Creation or double-digit inflation or both. The fact that it hasn't should scare the grey pants off anybody.

    TC Mits is not to blame - even if he's an investor or small saver.

  • Comment number 64.

    @41 Mike3

    An interesting question......I am not a trained economist but may I have a stab at an answer,
    As the US is the worlds largest economy by far and the dollar is in effect the world's reserve currency a US default would only be measured by a major increase in its rate of inflation and corresponding increase in its Treasury yields...remember,a main aim of its QE2 is to reduce Treasury yields long term.
    A more complete analysis of the effect of US inflation may be found here http://theinternationalforecaster.com/International_Forecaster_Weekly/An_Avalanche_of_Liquidity_Threatens_Us_With_Inflation.
    Cheers

  • Comment number 65.

    herringchoker:

    '"Pseudo-Keynesian" is a better descriptive term than the one you used.'

    Yes, well said. Then when it all goes totally wrong we can say it wasn't implemented fully and we should try it again, just like communism ;-)

  • Comment number 66.

    #63 truths33k3r - how about re-introducing slavery, at least slaves have to be fed.

    'It would have been much better for them if, instead of being ‘Freemen’, they had been slaves, and the property, instead of the hirelings, of Mr. Rushton. As it was, he would not have cared if one or all of them had become ill or died from the effects of exposure. It would have made no difference to him. There were plenty of others out of work and on the verge of starvation who would be very glad to take their places. But if they had been Rushton’s property, such work as this would have been deferred until it could be done without danger to the health and lives of the slaves; or at any rate, even if it were proceeded with during such weather, their owner would have seen to it that they were properly clothed and fed; he would have taken as much care of them as he would of his horse.

    People always take great care of their horses. If they were to overwork a horse and make it ill, it would cost something for medicine and the veterinary surgeon, to say nothing of the animal’s board and lodging. If they were to work their horses to death, they would have to buy others. But none of these considerations applies to workmen. If they work a man to death they can get another for nothing at the corner of the next street. They don’t have to buy him; all they have to do is to give him enough money to provide him with food and clothing – of a kind – while he is working for them. If they only make him ill, they will not have to feed him or provide him with medical care while he is laid up. He will either go without these things or pay for them himself. At the same time it must be admitted that the workman scores over both the horse and the slave, inasmuch as he enjoys the priceless blessing of Freedom. If he does not like the hirer’s conditions he need not accept them. He can refuse to work, and he can go and starve. There are no ropes on him. He is a Free man. He is the Heir of all the Ages. He enjoys perfect Liberty. He has the right to choose freely which he will do – Submit or Starve. Eat dirt or eat nothing.'

  • Comment number 67.

    Bob, thanks for the reply, however I am not sure the full cut and paste was really required.

    Keeping the post relevant to the blog America grew to be the greatest nation of modern times through embracing the market as a means of allocating capital and effort. Wealth came from production and trade.

    America's decline is due to a rejection of this philosophy, choosing to ignore their own constitution. The more benefits that people vote for themselves the less safe their jobs become and they become less and less competitive. We are now seeing the endgame of this policy with unsustainable debts and money printing to desperately maintain their welfare / warfare culture.

    What I cannot understand about leftist thinking is that you would rather people remained unemployed than work for a lower wage, gaining experience and skills. The minimum wage is fine for those that can command it but you make it illegal for those that cannot to work. People did not starve in the streets before the minimum wage and I see no shortage of jobs that need doing in our crumbling "post-industrial" cities.



  • Comment number 68.

    Evening Stephanie,
    "The US as deadbeat" strikes me as a political problem not an economic one.
    The US electorate didn't like what the Democrats were doing (renaging on all of their election promises) so they voted in the Republicans.
    The first steps the Republicans took was to reward all of the rich Americans with tax cuts in perpetuity, and to change the laws about how deficits were defined. This was sold as a mechanism to encourage the rich Americans to create more jobs. Time will tell if this new strategy works although it didn't work under George W Bush!
    Striking parallels here with what's happening in the UK, but I digress.

    The USA currently is running a trade deficit with over 90 countries around the world so it isn't just China that's the problem. The US has also run its country in deficit for 50 years and they have been the main trade mechanism for the world to function -hence their designation as the reserve currency. This cannot and will not change any time soon as I'm sure you are aware Stephanie.

    The problem seems to be (just as in the UK), the people (populace) are in denial that there is any problem at all and their lifesyle just continues as before.
    There MAY be some merit in kicking the can down the road since the toxic debt on the banks balance sheet has a finite lifetime which in the UK is approximately seven years (from 2007).
    If you care to analyse the US debt situation then real growth of about 3.5% will eventually wipe out their debt without causing another fiscal collapse so that is what they are aiming for. However, all the other countries around the world are trying to do the same thing and we can't all grow together as one country's exports are another country's imports.

    I fear that the solution that will be proposed to the people of the US is "let's have another war and invade a country which has resources that we require". This will create lots of real jobs and the resources stolen can then be used to pay back Americas debt.
    Don't forget -only politicians take us to war.

  • Comment number 69.

    Several comments in 2 parts:

    Part 1 General response to the above article

    Part 2 Response to first comments by watriler, zygote, fred and up2snuff.


    Part 1 General response to the article:
    There is no avoiding the thesis presented that: the US priced assets, US government crediworthiness and the US dollar as the world reserve currency: are at risk.

    This risk has matured, we are seeing the markets go after, (so far one by one), the PIIGS. France and the UK government are in the firing line. By sheer scale the US debt dwarfs the comination of the rest of the developed world's debt. In this way the markets, (who are not some mindless group of bottom feeders, but people like you and me investing to protect themselves and our pensions and savings), are acting rationally; even though they are in general too late, shutting the door after horse has bolted. Part of the market made their moves early, like the hedge funds and people like me who since 2004/5 have been screaming that there is something wrong with this picture. Some of the biggest and wisest (in my view) put their money in Gold.

    The appetite for investing in government debt worldwide is evaporating and the phony war since 2007 has only delayed the massive impact of the train crash that is rapidly approachiing. All we have seen so far is the attempt by the governments to slam on the squealing, failing brakes; which has slowed the train's approach but not sufficiently reduced the momentum of the inevitable impending impact; (which is so massive that it cannot be imagined).

    This is what Ben Bernanke (see above article and reading between the lines) would say if he dared or was allowed to.

    However there are issues this article cannot cover given its objective and scope which it addresses admirably given the necessity for brevity. They are addressed some by responding to some comments from other contributors to this blog; see below.



    Part 2)

    Going back to the 1st 4 comments : \bywatriler zygote fred up2snuff:

    2.1) watriler: how can we avoid toxic combo of public and private debt?

    response: You cant! Why? Because it has already happened, but this is a process and we are only at the beginning.

    You cant burn the candle at both ends and hope to have a candle at the end of it. What has our debt been spent on? Funding jobs in the public sector for votes and buying non wealth generating assets. Houses do not generate wealth they sit in the ground and only gain value because of limted supply and subsidised or scam rates of cheap credit. This is what the financial meltdown following the past 20 years boom was about. The rest of the money spent on a consumer boom for clothing, travel, restaurants and the high life. So there is nothing to show for the debt either in the public or the private sector.

    This crisis so far has been a phony war trying to avoid deflation and deliberately stoking inflation. Public and private debt are so high that inflation must erode the absolute numbers, because the US (and Europe) are already actually bankrupt. They can't pay back the deby and are finding it harder just to finance the interest on the debt. Inflation is the only option to buy time to avoid collapse.

    This now means money has no value, governments are trying to hold on to our trust but have nothing to do that with and all assets and prices have to be constantly re-valued upwards.


    2.2) Zygote: what should we flee to? Gold etc Heaven help us.

    Respones: based on response to watriler yes "fiat" currency has no credibility because of inflation and risk of sovereign default. Putting any cash into the banking & financial system or even shares means that the money has to work extremely hard to maintain value, never mind trying to earn a real return. Almost all investments will fail to do this and erode in value.

    What Ben Bernanke and other Central Bank Governors know,, but dare not say, is that the general public are being lied to when the governments and the central banks are issuing rapidly depreciating paper money and asking the public to trust them. This is theft, not just on a national scale, but on a global scale and threatens the wealth built up over generations of ordinary people; especially those who continue to trust Banks and governments by putting their wealth into cash based assets.

    Is there any alternative to Gold? Not in the short term, (in my view and in the view of some very successful hedge funds who predicted the financial crisis and housing bubble burst and have already moved 80% of their assets and investments into gold).


    There will be a disorderly collapse globally in currencies and government credit-worthiness which will create a parabolic rise in gold compared to current gold prices.

    Why MUST this happen? Because government cuts in spending have not actually reduced their borrowing which continues to increase. Governments are borrowing to fund the deficit between tax revenue and their spending, which is still increasing. That means the total debt continues to grow. The markets know that governments cannot pay back the debt and are struggling to get finance to pay the interest on their debts. They will not lend to governments under these conditions. That will happen suddenly and that is why it will be disorderly and why there will be a rush to gold.

    Problems of such an enormous scale, (the truth is really more bizarre and surreal than fiction), can only be resolved in the medium to long term as new rules are developed and implemented for: World Trade, Global & National Financial Infrastructure, Global and National Banking, National Debt & Currencies, Commercial and Retail borrowing/credit etc. All the political implications have to be worked through, trying to bring order out of disorder and these alone look likely to challenge most so called democracies, many of whom will have to create states of emergency in order to force through the unpalatable reforms.

    In real terms that means most of the useless EU legislation and red tape have to be removed and the standard of living of European citizens will be driven down sharply, with the PIIGS having the same standard of living as the modest SE Asian areas.


    2.3) Fred responding to Zygote: The people to watch are the Chinese....

    Response: Yes the people to watch ARE the Chinese, but in many more ways and for very many more critical issues and policies than assumed in your comment. Yes it could well be that the Chinese want to lose their investment in US dollars if it means they knock the US off the top dog spot much quicker than they would otherwise have done, with the prospecte of making much more than they loose as a consequence.

    It is insufficient and insubstantial to use the Chinese in this discussion without integrating the wider issues that contribute to their actions and policies.

    What we are seeing now is a full scale and very aggressive trade and currency war which the press has referred to but underplayed.

    The Chinese are less interested in how much money they will lose if the $USD collapses, because they know how much there is to gain by displacing the US dollar as the reserve currency and to price all commodities with the associated loss of US global political power and control.

    The precedent has already been set. This is what the US did to the UK/British Empire over 2 world wars.

    The bankrupt post World War 2 UK/British Empire was forced by the Americans to concede the pre-eminence of the British Pound Sterling GBP and to lose trade control over most of the world trade and commodity pricing, which also meant forcing the UK to relinquish political control of its Empire.

    In return the US financed a penniless and greatly indebted UK/British Empire threatened by economic implosion and famine. Why did they have the money? Because the UK/Empire spent all it had in US War & Munitions factories and to pay for the US army, navy and airforce. They paid for every bullet the US fired and continued paying until recently. (The Arab Oil States had to do the same and paid the US (& allies) for the 1st Gulf war to expel Iraq from Kuwait and prevent them taking over the whole of the Arabian Gulf).

    Yes the situation was that desperate, otherwise why would the UK have agreed?

    The Chinese similarly have a lot to gain by the USD losing reserve currency status because whatever happens the Chinese will be the major player in setting up the alternative to suit their interests in world trade, commodity pricing and global political power.

    The struggle to dominate world trade is all-out war, which is being conducted by beggar-thy-neighbour policies. If the cost of this is to lose all Chinese dollar loans to the US government, the calculation is based on how much more they will make in future by emasculating the USD and reducing US global political and economic controls.

    What the Chinese are risking domestically is another matter.

    Their domestic market's economic boom is putting most of it's citizens' wealth into property which is more of a bubble than the US and Europe's was. How can an appartment in a backwater Chinese town double in value in ONE year, representing a multiple of average incomes much higher if not double the US/European ratio's? This is made more extreme and unsustainable because their mortgages are based on the assumption that the capital will never be repaid in the short to medium term and only the interest can be serviced, but is supposedly redeemed based on the assumption of inexorable rising housing prices.

    China can't sustain this folly. Any economic model that pours all of it's citizen's wealth into the price of property is madness; ours is madness, theirs is madness. Property is not a creative wealth generating asset. The Chinese Banks have a much greater exposure to bad debt putting their banks at risk and their Financial Institutions have neither the infrastructure, sophistication or experience to handle the bust when it happens.

    The Chinese have started encouraging its citizens to buy gold because when the bust happens with the loss in confidence in the yuan/renimbi, it will leave cash as worthless paper or numbers in banks. This can only be mitigated if sufficient gold is held as seed-corn to generate future private wealth and economic activity.

    High inflation and disastrous financial management of the economy is what destroyed Chang Kai Chek and allowed Mao and the communists to succeed and seize power. The Chinese are now struggling with the same issues 50-60 years later and are trying to avoid what is termed a "hard landing" for their economy: high inflation, bust in asset prices, loss of confidence in paper money and government, mass protests and riots, (that was what the brutally suppressed Tiananman square protest was all about and the scale of the problem then is dwarfed by what they are facing now).

    Although the Chinese are potentially in a very unstable situation, they still have much to gain by taking advantage of the opportunity to destroy the USD as the world's reserve currency and dismantling the US economic control of much of the world economy. It is an opportunity they may not have created but they can certainly use it in their interests. It may be a price the Chinese believe is worth paying, but they can succeed only if Chinese economic growth and stability are maintained.

    What we are seeing now is an attempt to control in the short term which crisis will peak first: the US dollar and creditworthiness collapse or the Chinese property bubble burst and inflationary spiral.

    In any case this conflict and the US loss of influence and control will continue whatever happens. The details and the timing can only be adjusted in a minor way and only for the short term.

    The US can look forward to being a bigger, less socially stable and pleasant, but very economically dynamic version of Germany. Germany is able to dominate and throw its weight about more than any other European country, but remains severly constrained. Similarly, the US will be able to do the same with many more constraints. It will be a shadow of its current presence and force in the world. Many countries will shake off or significantly reduce and loosen the behind the scences, but severe, controls, the US now imposes to protect US interests at others' expense.

    The US will remain under suspicion given its postwar activity in Vietnam, Chile, the whole of Central and South Americas and the Carribean, Cyprus, Lebanon, Palestine/Israel, Arab Oil states, Indonesia, Philipines etc etc. Remember, the main issue leading to war against Iraq, (the US' ally in the region), was Saddam Hussein deciding that it was in Iraq's interests to price oil in Euro's (and possibly a basket of currencies) and not exclusively US dollars. He was right technically, but wrong politically, he never imagined the US would be able to do what it did. With hindsight however, he paid the price so that other countries can start to develop and implement this strategy as the US can no longer do to other countries what it did to Iraq. That period of post war UD power is gone for good.

    Countries which have either been destabilised or largely made to act in the US interest will be able to move out from under this hegemony and seek to balance continuing but reduced US influence within other blocks of power such as the Chinese and to a lesser extent Indian, Russian. Oil and commodities will not be priced exclusively by USD for that much longer.


    Up2snuff:
    1) The Fed have cleaned up the bad debt. (SO YOU SAY!! The truth is much of the bad debt is still hidden and has not matured and in addition, wait and see what happens as mortgage interest rates are hiked as inflation gets out of control)

    2) Flight to other currencies

    Response: You can't just flee to another currency en masse basically transferring the value of your wealth & savings to another currency and you are investing in another economy. You get practically no interest on this money and global inflation will reduce the value of the amount invested. In any case at a certain point such large movements of money have severe consequences because those countries' economies will no longer be able to export as much and this will distort their balance of trade, borrowing, and general economy, unless they have already moved the whole of their productive capacity upstream to high value niche products. Switzerland is the classic example and its currency is at historic highs. Even so the point is that the Swiss market is simply not big enough to absorb the mass flight out of the dollar it is less than 1% of relative size and this applies to most other currencies and countries; so this option is not feasible.

    The only real alternative is gold, it is globally recognised as a repository of value especially in major crises and this crises dwarfs all previous crises combined in modern history. The Chinese and Indian culture has an ingrained trust in gold and they have a habit of using spare case to buy gold (and silver).

    However in order for gold to absorb that amount of buying it has to increase in real terms many multiples of its current price. $2,400/oZ is a modest price, the overshoot some are talking about is $4,000. If the perfect storm occurs with the loss of the US as global reserve currency and the collapse of confidence in the Chinese RMB which will spill over into India, make the Euro worse and hit every over in-debted country, $4000 will be cheap.






  • Comment number 70.

    56 HC
    Thanks, segron. I agree 100%. I would make one suggestion. Because they omit the countercyclical aspect of Keynes' idea, i.e. they approve the borrowing but not the payback, "Pseudo-Keynesian" is a better descriptive term than the one you used.

    Am not certain how you are using the term "Counter cyclical" This usally refers to both borrowing and payback.You seem to be using it only in relation to payback.

    To agree 100% with anyone implies conformity rather than a considered opinion.No-one is suggesting that deficits should not be repaid,the difference lies in the mechanism involved.Keynes thought that deficits would shrink with economic growth and increased government receipts.Others like Mr.Osborne think that cuts in spending are the answer.

    Mervyn King recently confided to Wilileaks that Osborne and Cameron are more interested in politics than economics so let`s hope they are well advised. However,Cuts without growth hasn`t worked for Ireland and Greece,their deficits are growing and there is talk of default,-a far worse option for what`s left of the banking system.

    2011 is the crunch time for the USA,the EU and Britain.Deficitis has gripped the latter,we shall soon see who is right.

  • Comment number 71.

    58. Comparing the US/UK with Greece, Ireland or Belgium France and Germany is ridiculous as they aren't monopoly currency suppliers! This is basic Soft Currency Economics or Modern Monetary Theory aka Central Bank Operational Reality...government cheques don't bounce they simply create money, just as taxes destroy money.

    I disagree with the premise that the UK is ok as we own our currency and the government can ultimately just write cheques out of thin air.

    Almost all money in the UK is created by debt - private and corporate and government borrowings. The government doesn't normally just "write cheques" to pay for stuff... it sells interest bearing bonds into the market, many of which are bought ourselves (pension funds etc) but many are sold to foreigners.

    When the government does create money by "writing cheques out of thin air" which is similar to the QE actions of the Bank of England, then it starts to devalue the currency. Although there is some justification behind trying to increase the velocity of money (money stashed away and not used causes economic recession) these steps should be considered the last desperate attempts to revive a failing economy, akin to using a defibrillator.

    The fundamental problem with the UK (and the USA) is that not enough real wealth is being generated by enough people, as stated by Ben (#60) and Bob M above. Unfortunately the worse is still to come, as we have done nothing to tackle the burden of pensions for all the millions of state workers who retiring at 60 will need 20-30 years of pensions and health spending to be provided by the shrinking working population.

  • Comment number 72.

    #67 truths33k3r

    sorry about pasting the whole thing, I know that you have probably seen it before but others on here may not have.

    I don't disagree with where you are coming from, as I see it all wealth is derived from labour utilising the means of production.
    I have no issue with the owner of the means of production sharing with labour the wealth created therefrom.
    I do have issue with the owner of the means of production witholding those means to gain unfair advantage.
    Those in the past (and those who do so currently) who have used this advantage of restricting the means of production to amass great wealth have no interest in paying a fair days pay for a fair days work, it is not sufficiently profitable for them to rebuild our crumbling cities and so those cities will continue to crumble.
    They will only allow the means of production to be utilised once they have consumed their great store of stored labour (wealth) but it is only by utilising the means of production and fairly sharing the wealth created that the populace have sufficient to restore their cities.

    (for anybody interested google 'The Great Money Trick')

    The problem in all of this is Capital Accumulation and inadequate/unfair redistribution mechanisms.







  • Comment number 73.

    65. At 7:02pm on 08 Jan 2011, Ben wrote:
    herringchoker:
    '"Pseudo-Keynesian" is a better descriptive term than the one you used.'
    Yes, well said. Then when it all goes totally wrong we can say it wasn't implemented fully and we should try it again, just like communism ;-)

    How would you define "Pseudo Keynesianism?". I`m curious,Herring Choker who you praised used the term counter-cyclical incorrectly,believing that for "Neo Keynesian`s it only referred to spendng not payback which is not the case.

    The reason there is a lively debate now is that the crisis resulting from the collapse of private capital around the world is still with us.Countries like Greece and Ireland which have embarked on deep cuts to resolve their sovereign debt problems are in deep trouble,debt and deficit still increasing.

    The risk is it will happen here and across the Eurozone.For us 2011 is crunch time.My own view is that the government arfe taking risks in the service of a political ideology.Don`t encourage them with your nonsense.

  • Comment number 74.

    72 Bobrocket

    And I think we have summarised the eternal tension between capital and labour. The issue comes with what is "fair"? Does someone outside of the employer / employee relationship have to arbitrate?

    Contrary to popular belief libertarians do not like to see injustice. Not every employer is evil. My employer does not pay badly at all and he could choose not to. However the fact remains that there are people out there how do not justify nearly £6 an hour and there are also businesses, especially small ones, who cannot pay it and therefore fail to employ and cut hours to stay afloat. Add onto this the cost of NI and regulation and the incentive reduces even further.

    The Guardian is forever bleating about the negative effects of unemployment - alienation, lack of opportunity etc It is not just about money.

  • Comment number 75.

    I really cannot understand why the ultimate solution is seen by many as to buy GOLD!

    It's simply a variation of the mentality that got us into this mess!

  • Comment number 76.

    There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final total catastrophe of the currency involved.
    —Ludwig von Mises

  • Comment number 77.

    #74 truths33k3r

    I agree it goes both ways, there is nothing wrong with a fair days work for a fair days pay, some people can't justify £6 per day let alone £6 per hour for their contribution, but if we are to free the owners of the means of production from the restriction of minimum pay then we must also free the monopoly on the means that the owners currently enjoy to allow labour to create the wealth at will.


    Your #76, You, Me and Ludwig agree on that one.



  • Comment number 78.

    75 - Gold is the ultimate currency, free from government intervention. You do not have to exchange your currency for it, but I would advise having some tangible assets - land, property, silver, commodities to hedge against the debasement of paper currencies.

    The current power structures have a vested interest in making anyone investing in gold appear to be a tin foil hat crackpot. Do you think that the rich own physical gold?

    Lots of good articles on 24hgold.com. Make up your own mind.

  • Comment number 79.

    Hello bryhers and all

    Thanks for the thoughtful response.

    You wrote:
    "Am not certain how you are using the term 'Counter cyclical' This usally refers to both borrowing and payback."

    I mean simply this:
    Borrowing alternating with payback may be Keynesian.
    Borrowing decade after decade without payback is not Keynesian. I am simply suggesting we call it Pseudo-Keynesian. Perhaps those who defend it are attempting to add credibility to their position by attaching a famous name to it - a bit of name-dropping, if you will.

    You wrote:
    "To agree 100% with anyone implies conformity rather than a considered opinion."
    Quite so, but it should be clear that I meant 100% with regard to segron's succinct post above mine. Beyond that I am sure we could find differences of opinion.

    You wrote:
    "No-one is suggesting that deficits should not be repaid..."
    Quite so again. But of course, even those who borrow without any intention to repay aren't likely to admit it so perhaps it doesn't mean much. The problem is that history suggests what the politicians don't. It's kind of a "boy cries wolf" effect if you like. Except that this boy cries "now is the time to borrow and spend". He never cries "now is the time to pay down this debt".

    I would love to the see the growth approach work. If it does not, or if it can not, I believe that will be because the difficult groundwork of accumulating budget surpluses between recessions was not done. This problem has been so widespread across the developed world, I am beginning to wonder if we will ever find out if the Keynes idea works or not. However we are quite likely to find out if this Pseudo-Keynesian idea of long-term debt accumulation works or not.

    Salut, bryhers.

  • Comment number 80.

    Any signs of a recovery to the status quo ante mean a collapse in USD, because the USD will not be the safe haven that it is for some now.

    On the other hand, the Euro will continue to demonstrate its strength in the face of various trials and the USD will diminish in value slowly as a result.

    The only solution in the long run is heavy investment in new technology and infrastructure. Things won't get solved, the problems will just cease to be relevant. What we all need now is real wealth, and that means high tech and transnational management.

  • Comment number 81.

    #59. RNG wrote:

    "John_from_Hendon's 'solution' is a twenty plus year depression?"

    WRONG - unless something similar to the debt de-leveraging I envisage (and historical analysis suggests has to precede a recovery) the 20 year depression is what we are in for. My suggested policies are precisely to avoid a 20 year depression!

    In short get the duff debt deflated asap - do not wait till the debtors die - which is the Fools of Threadneedle Street solution. Dead banks must die.

    #31. Nick wrote:

    "the only real losers will be those pesky savers who are keeping money out of the system"

    Do you have any idea what happens when savers do not get rational returns on their savings - they save even harder - the one thing they will not ever do in such circumstances is spend! To get savers to spend you have to increase their returns - this increases their confidence and thus they feel that they need a smaller cushion for a rainy day and so are prepared to spend! You and the Fools of Threadneedle Street are wrong!

    Additionally unless and until market returns rise the pensions black hole will get, if not exponentially worse then, dramatically worse. In fact it is not worth getting a pension from any 'pensions' provide unless returns increase and while the annuities are so poor as to make it not worthwhile unless you are a millionaire in which case you will be investing directly anyway and most probably abroad.

    The fools are deliberately heading the whole financial system over the edge of the abyss.

    #55. Bob Matthews wrote:

    "So John, you want to increase interest rates so that you and others of you ilk can get an increased return on your investments; but why should you be entitled to a return when those that actually work to produce profits for you have to pay to service bank debt brought about by rapacious investors who unwisely invested in financial products which turned out to be junk paper?"

    What tripe! 300 years of growth has been based upon money having a positive price. No rational system of economics can be postulated with worthless money. Yet that is what we have today - the total destruction of economics.

    By the way you might have well have written what right do the workers have to be paid - they should have their pay halved, or work for nothing and still be made to work. Capitalism needs both savers and borrowers and there needs to be the establish relationship between them. Borrowers repay their borrowing and pay a rational price and savers get a rational return. If you overthrow this system all economic activity collapses - so does money and you will very quickly return the wheelbarrow loads of money for a loaf of bread (and ten wheelbarrows tomorrow) And by the way all private property rights and legal property ownership will be lost too so those safe bricks and mortar are nothing of the sort!

    The reason the price of money has to be rational and positive is without it that all economic activity collapses - it is nothing to do with savers.

  • Comment number 82.

    Gold as the ultimate currency ...?
    The problem with gold is that there simply isn't enough of it ... otherwise we would have gold coins as per original e.g. gold sovereigns. This is helping to push up its price as a pure physical supply issue - Platinum? ... Similar
    The ultimate currency is ... believe it or not ...prime agricultural land or rather shares/units in it. The next monetary currency ... will be e.g. copper? ... as copper becomes scarce. Our coin money is a mixture of copper/nickel/etc so as to make smelting it for re-cycling as 'non-economic'.
    Currency is linked to the overall resources of a nation with some political and psychological value thrown in also.
    The strongest currencies are 'resourced backed' but not even on the value of the coin itself.
    'Penny wise pound foolish' ... might be coming back in fashion.

  • Comment number 83.

    82. At 11:26pm on 08 Jan 2011, nautonier wrote:
    "The problem with gold is that there simply isn't enough of it ... otherwise we would have gold coins as per original e.g. gold sovereigns."

    Here is some food for thought.

    http://www.24hgold.com/english/news-gold-silver-the-money-supply-with-a-gold-standard.aspx?article=3277516694G10020&redirect=false&contributor=Nathan+Lewis

    The reason currency stopped being backed by resources is that governments hate restrictions on their ability to deficit finance to buy votes and pay for wars.

  • Comment number 84.

    > The US as deadbeat:

    Indeed. Is the U.S. already as indebted as Greece?

    Statistics suggest that the U.S. has 27 times more people than Greece, 24% more national debt on average per person, and 34 times more national debt in total.

    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 85.

    The last sentence of the last contribution by truths33k3r is unfortunately the only way our so-called modern parliamentary democracies work. Fill their mouths with bread and keep them at the games, then they will fail to hold the government to account. Result: decline and fall of the Roman, (US/European Empires).

    The US/UK economies need war because there is a critical mass of wealth invested in the military-defence industries. Having sold a bomb you need it to be consumed in order to generate an order for another bomb, otherwise the wealth invested in the infrastructure capable of manufacturing bombs is lost as it cannot be used in any other way to generate real life-improving value. Bomb consuption need wars, legal or illegal, hence Cheney Bush Blair etc. This is what our healthy economic model assumes as necessary for economic growth and health.

    We are witnessing and participating in a colossal and dangerous threat to the established world economic norms and models. There will be a decline and fall of the current world economic orders, currencies and trade models. Everything has to go in the melting pot and what will emerge is hard to predict in the long term.

    At a more fundamental level the issue is continuous economic growth at the margins, which values the real term growth of the value of investments as the only measure of success.

    This current model of "Western" captialism and parliamentary democracy means constant consumption with unsustainable consequences to the whole earth eco-system on which we depend to generate oxygen and food from healthy sustinable plant life.

    There is a biblical curse on anyone who cultivates an adjoining "unowned" wild plot of land simply to gain more wealth rather than sustaining themselves and their dependents modestly within current cultivated resources. This was based on the historical precedence of agriculture generating surpluses which then resulted in the creation of cities and "civilisations" which embodied the cultural means developed for humans to live en-masse based on the assumption for constant growth at all levels and at the margins. Fine when world population is a few million but at breaking point when world population is at several billion and still growing all with aspirations and unrealistic expectations of a US middle class lifestyle, over fed, in large inefficient houses, addicted to spending an ever larger proportion of our lives in virtual reality land of TV, internet, mass media, games, retail consumption, holidays, clothing, shopping etc. dedicated to the constitutional guarantee to protect the demonic pursuit of individual liberty and happiness at the expense of the greater good.

    This curse we have unloosed with devastating consequences in our current political and economic models; it may have taken 10,000 years or so but we are now pushing ourselves over the edge like a mad group mass-hysterical group psychotic lemmings.

    Yes Capitalism is an more efficient way of allocating resources and generating economic acitivity and wealth, but its current accounting systems based on the absolute value of cash does not value all of the off=balance sheet things that make life livable, healthy, harmonious with creation and spiritually and happy in a fundamental not superficial way.

    The fact that our accounting systems are so narrowly defined is not even on the agenda and has not been raised once in this blog. That in itself speaks volumes.

    Our society values relative increase in wealth, not people and their well-being or well-fare. How do you value justice, access to education and privilege, reward for hard work, intelligence, applied wisdom, risk in spending time to make someone else's life better instead of earning more wealth? etc etc. The fact that our accounting systems only values an increase in numbers and making the false assumption that this increases wealth is an unsustainable foundation to our current global economic model.

    No I am not a socialist/communist and detest what they did and how, because they themselves commoditised life into a consumable commodity so that the elite could sustain, for a very short historical period, their access to power and privilege by subjecting the masses to misery, injustice and drudgery.

    Nevertheless, for as long as the current flawed version of global capitalism associated with corrupt dumbed down parliamentary democracies, represented by governments supposedly elected by the people, (in fact elected by the impact of an oligarchy and their control of people's perceptions through the media and press), but in reality these democracies have sold out and are in thrall to a shadowy elite.

    We must understand that what is happening now is only a demonic enslavement to making the rich richer and the poor poorer. For as long as this economic/civilisation model originating in the middle east and now taken to its logical conclusion by "the West" holds sway, we are to be victims to a constant erosion of sustainable existence as the global ecology is sacrificed to produce and consume more.

    This model is bound to create cycles of boom and bust, but it seems each 50=100 years or so years we create a total meltdown scenario, each one worse and more catastrophic than the last. And we only do the minimum to repair each bust, sowing the seeds for the next mega meltdown, each time accelarating the unsustainable rate of consumption of world resources and destroying the ecology and fertility in the process.

    For as long as we are in this destructive cycle using the current assumptions, and discounting the off-balance sheet social and spiritual values, we will create crises of which this one is the largest in a series.

    This crises, all things being equal, i.e. we don't change what we value and continue to base a healthy economy on inexorable growth at the margins, (which is the road to total destruction), then Gold in the short to medium term will be the inevitable repository of value during the disorderly collapse of confidence, until the next models emerge.

    The USD is on the way out. The emerging political, social and economic models will only emerge out of chaos. During this chaos value cannot be attributed to anything that does not have people's confidence, and this has to be a relatively easily valued and traded commodity. The only thing that has represented this confidence and value for tens of thousands of years except the last 70 or so, is gold and to a much lesser extent silver. The relatively short period in history when we issued paper which has not been tied to gold in an absolute relationship is coming to an end. It is an aberration in world history that has accelerated human population and economic growth at the expense of everything that makes life on earth possible for the whole of creation.

    The short term survival strategy is gold. The long term strategy is to heed the biblical curse, but we will not do that, so gold will only carry value and wealth over into the next unsustainaable human distortion of a sustainable way of living on earth. The long term is disaster, the short term is gold on the way to disaster.

    The truth is simple either there is absolute truth or relative truth. We have decided to abandon absolute truth in favour of relative truth, so we will value everything that can be quantified, except those things that make us spiritually healty, happy and enable us to live in harmony with creation.

    So, hang your brains on the hook behind the door, don't change anything, watch the US dollar and the US government go down the tubes and take us with it while continuing to trust wealth instead of absolute values of spiritual physical, psychological and ecological harmony happiness and well-being and prepare for the mega crash by buying gold.

  • Comment number 86.

    HH79


    "I would love to the see the growth approach work. If it does not, or if it can not, I believe that will be because the difficult groundwork of accumulating budget surpluses between recessions was not done. This problem has been so widespread across the developed world, I am beginning to wonder if we will ever find out if the Keynes idea works or not. However we are quite likely to find out if this Pseudo-Keynesian idea of long-term debt accumulation works or not."

    Salut, bryhers.

    It has: Weak growth resumed in the last quarter of 2009 and has sincxe accelerated.Tax revenues and have been rising and tghe deficit falling.So much so that Mr,Osborne was abkle to wing it to Brussels and offer 3.5 billion to the Irish,nor has he excluded Portugal or Spain of they need it.These are not the actions of a man who a few weeks earlier claimed to be facing a downgrading of British debt and a meldown.All politics of course buit trusting people with no knowledge of economics believed it.

    Unfortunately deficitis has gripped the Euro which remains deep in crisis apart from Germany.The USA has continued to spend,output is rising but employment,-a lagging indicator, has hardly moved.


  • Comment number 87.

    76. At 9:24pm on 08 Jan 2011, truths33k3r wrote:
    "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final total catastrophe of the currency involved.
    —Ludwig von Mises"

    As Keynes` remarked,practical men of business who believe themselves to be speaking common sensze are usually repeating the ideas of some defunct economist.

    In your case grandfather Ludwig,who along with Hayek,Friedman and others tried to flog the dead horse of the market economy to account for boom and slump.Latterly it was called monetarism,revived during the Thatcher administration it is again in full flood with the small state private business rhetoric of Mr.Osborne.

    The state has increased its functions for three reasons,economic crisis,war and war preparation and public services.While this trend is not irreversible in the short term,the historical dynamic propelling it forward is powerful, as we saw in the most recwnt collapse of private capital across the world.


  • Comment number 88.

    Globalisation has to end.

    The root cause of the deficits is the idea that production can be based in poverty wage economies but consumption takes place in developed economies who pay for it by borrowing.

    The developed economies also have to bear the dead weight of mass unemployment as well and this is simply unsustainable.

    If you add in the rigged nature of the currency markets - the Chinese Communist government rigs its exchange rate - then the market does not correct for imbalances by revaluing the export currency and devaluing the importing currency whose trade is in deficit. This is where we now are and no amount of cutting or reflating makes any difference to the trade imbalance.

    The game is up - import controls and tarriffs are going to happen one way or another. If the Tea Party get their way - and all the signs are that Congress will cut spending hard - then as in Eire the US will dive into a deep recession which will decimate jobs - back to the 1930s.

    At this point the political climate will demand a solution - and having run out of domestic people to blame it seems clear that all eyes will turn to stopping imports and creating domestic jobs.

    Given the spiraling rise in food and energy prices combined with the fall in living standards in the US, real pain is evident on the streets
    and the decimation of the middle class is the spark that has always led to the rise of far right political movements of which I see the Tea Party as playing the role of the midwife to the rebirth of fascism, just as similar poltical trends did to allow the Nazis to emerge in Europe- remember the Daily Mail's headline in the UK - "Horrah for the Blackshirts!"

    What would American fascism look like? Firstly it would have a strong racial element, secondly it would be isolationist and thirdly it would be militarist. I think they'd rattle the sabres very loudly at the left wing governments in South America and the situation in Korea would provide a focus for an aggressive foreign policy.

    In such a racially diverse nation as the USA, the rise of the far right couldn't happen without major unrest - indeed even civil war.

    Obama is caught between a rock and a hard place with a Republican House and no way out to create jobs. A Keynesian solution requires government to reflate during recessions and deflate during growth periods to balance spenidng across the cycle, but US politics means that tax cuts are the be all, end all, so government doesn't run surpluses when it needs to, but runs the printing presses during recessions.

    Clearly the US people need to lose their shirts before they will support a policy of having a sustainable economy - the only question is how much pain must there be before they learn this lesson?

    Major parts of the US state going bust and being allowed to do so by the Federal authorities will send a shockwave through the markets and could well spark the loss of confidence Stephanie highlights.

    What will this mean for us across the Pond? IMHO we have all been the victims of the American Dream and the buck as the world's reserve currency - most the financial lunacy we have seen eminated from Wall Street and NeoCon politics - sweeping this away would remove a large part of the libertarian delusion from political debate.

    Economies and societies must become sustainable - produce what we consume - employing our people - growing our own food - generating our own energy - protecting our environment for our childrens' future - yes we trade with our neighbours but in a sustainable way.

    The era of the global swashbuckler gambling on exploiting opportunities to get rich by buying cheap and selling dear regardless of the consequences as their "god-given right to freedom" must end.

    This is the essence of the American Dream - it's over.

  • Comment number 89.

    #85 crgO,

    A well presented, thought provoking piece, the majority of which I concur with.

    However, I must pick you up on a few points:

    "The fact that our accounting systems are so narrowly defined is not even on the agenda and has not been raised once in this blog."

    This is simply not true. A number of posters have been making the same points since the inception of this blog.


    "The short term survival strategy is gold."

    Whilst, on face value, this may be attractive you also have to look at the flaws in the gold market itself. Try and demand 'real' gold for the certificates you might hold; look at the actions of the futures markets, etc. etc.

    In my opinion the short/medium term strategy should be based upon collabrative protectionist policies (pan-European). This would offer us the possibility of assuring the wellbeing of our citizens by giving them work opportunities.

    Having said that, in the longer term, I totally agree with you that economic and social wellbeing demands the development of thoughts and systems based upon value and not upon mere money bean-counting. However, the identifier of wealth/health also has to be re-defined.

  • Comment number 90.

    If you want to go Nuclear, pay for your oil in your own currency! (Or Euro's.)It certainly did it for Saddam H.

  • Comment number 91.

    #89. foredeckdave wrote:

    On Gold:

    Gold (the metal - not paper gold) is good if there are no trusted currencies and no trusted deposit holders remaining. Real gold requires physical security - so costs money to own. The dash for gold and it exceedingly high price shows just how bad things are. Of course the price of gold can still rise further and it can also fall, further the use of gold in manufacturing pushed the price about too. In the end no investment is safe. Holding some gold might be a good hedge against currency collapse, but there are costs.

    I would only recommend considering holding physical gold in the UK (or the EU) if you couldn't find a Financial Services Compensation scheme deposit taker - I guess there are 20 or 30 "safe" ones (@£85K each) plus the same again in equities, government and corporate bonds spread over the 'safe' EU countries - so I guess you need to have investments of more than £8 to £10 million to even bother thinking about it!

    Investing in the US? - I don't think so! China - it is actually very difficult to invest and requires considerable expense and time to visit and investigate the opportunities - ditto India - so not unless you have more than £100 million to invest I guess and then for the long term only. What about Russia, Vietnam, Nigeria, Brazil? These I think require that you have your own investment bank and bankers!

    "short/medium term strategy should be based upon collaborative protectionist policies (pan-European)"

    You will I think recall that my view is that economic salvation is only to be achieved via making use of the skills of one's workforce at the right price. My suggested economic strategy is to get from where we are today to a competitive position as quickly as possible. However this necessitates labour price competitiveness and this means a competitive personal cost basis which in turn means that the major elements of household expenditure are competitively priced on an international basis - i.e. UK house prices are much lower than they are at present!!!

    First we must get house prices down to Irish or Spanish levels and to do so as an aim of policy. It is all very well Government ministers looking for stable house prices (as some chap did last week) - but if we have stability at present levels we have to devalue sterling by 50% or so!!! We probably need a little of both but house prices must fall and we must handle the consequences of this in our secured lending sector.

    "Slagging off bean counters(précis)"

    Bean counting undoubtedly needs reform - particularly in the need for more plurality of auditing and breaking forever the relationship of consultancy with auditing.

  • Comment number 92.

    83. At 11:49pm on 08 Jan 2011, truths33k3r wrote:

    82. At 11:26pm on 08 Jan 2011, nautonier wrote:
    "The problem with gold is that there simply isn't enough of it ... otherwise we would have gold coins as per original e.g. gold sovereigns."

    Here is some food for thought.

    http://www.24hgold.com/english/news-gold-silver-the-money-supply-with-a-gold-standard.aspx?article=3277516694G10020&redirect=false&contributor=Nathan+Lewis

    The reason currency stopped being backed by resources is that governments hate restrictions on their ability to deficit finance to buy votes and pay for wars.

    .................
    Thanks - very good link. However, currencies are backed with resources, indirectly but not identified with a particular standard.e.g. Brazilian currency 'stronger' ... not because linked to e.g. gold but because of a strong and growing economy.
    Chinese currency ... will not replace the US $ ... because many do not trust it (the Chinese communists).
    The terminology is difficult viz and viz resource backing. With the UK currency ... it is holding up in exchange rate terms and not devaluing further because our UK govt is trusted (globally) to tax its citizens until our pips squeak to pay off the budget deficits and liabilities and to keep a wide open economy for the benefit of global spivs and speculators.
    The reasons why US $ is still and will remain global reserve currency are complex until it is replaced by e.g. a Brazilian currency in about 20 years time?
    It is the heavy UK domestic taxes that stop the GBP falling heavily in exchange rate terms ... nothing to do with false GDP growth in the UK.

  • Comment number 93.

    The United States have recently pumped in millions of dollars to stabilise the fragile economic situation because the unemployment rate still remains at high 9%, an unusual high unemployment rate in the US.

    They did so again and again since the financial crisis of 2009 and there has been no breakthrough on the road to recovery.

    The US w0n´t be able to do this again and again, as the trust in the strength is weakened by rising up the public debt.

    The US have borrowed extremely high amounts of money in China and have therefore moved themselves in a dependent situation.

  • Comment number 94.

    93. At 11:56am on 09 Jan 2011, new_germany wrote:
    The US have borrowed extremely high amounts of money in China and have therefore moved themselves in a dependent situation.
    ..................
    That is deliberate from both China and USA ... they are both dependent on each other for success ... with China now the stronger and sitting on the fence and hedging and able to manipulate ... but a long long way from ever being 'trusted' on a global scale in terms of replacing the US $ as reserve currency. Psychology is a major factor in currency issues. The US $ is pre-eminent and so are its assets for many years to come.
    The UK is heavily in debt to China also.

  • Comment number 95.

    " for all the talk of spending cuts - there is a zero support - in or outside Congress for cuts in the benefit programmes for retirees which take up an ever-larger share of the budget."

    Perhaps this should read "there is one Congressman seriously talking about cuts... Ron Paul", to be factually correct...

  • Comment number 96.

    93. At 11:56am on 09 Jan 2011, new_germany wrote:
    "The United States have recently pumped in millions of dollars to stabilise the fragile economic situation because the unemployment rate still remains at high 9%, an unusual high unemployment rate in the US.
    They did so again and again since the financial crisis of 2009 and there has been no breakthrough on the road to recovery.
    The US w0n´t be able to do this again and again, as the trust in the strength is weakened by rising up the public debt."

    Your final point on public debt is correct, but should resolve if the various fiscal and monetary measures continue to work.

    The first steps on the road to recovery have been taken.Output has risen by 2.6% in 2010 and has just exceeded its previous peak before the recession.Employment however is a lagging indicator,government and companies only take on new staff when balance sheets have been repaired and there is confidence in the recovery.Because of the severity of the collapse in private capital, this will take time.


    "

  • Comment number 97.

    91. At 10:37am on 09 Jan 2011, John_from_Hendon wrote:
    #89. foredeckdave wrote:

    On Gold:

    Gold (the metal - not paper gold) is good if there are no trusted currencies and no trusted deposit holders remaining. Real gold requires physical security - so costs money to own. The dash for gold and it exceedingly high price shows just how bad things are. Of course the price of gold can still rise further and it can also fall, further the use of gold in manufacturing pushed the price about too. In the end no investment is safe. Holding some gold might be a good hedge against currency collapse, but there are costs.

    I would only recommend considering holding physical gold in the UK (or the EU) if you couldn't find a Financial Services Compensation scheme deposit taker - I guess there are 20 or 30 "safe" ones (@£85K each) plus the same again in equities, government and corporate bonds spread over the 'safe' EU countries - so I guess you need to have investments of more than £8 to £10 million to even bother thinking about it!
    ------------------------------------------------------------------------
    Seeing gold continually reach new highs, I am often reminded of a line from the Larry Norman song 'I wish we'd all been ready' :
    " ... a loaf of bread will buy a bag of gold ... "

  • Comment number 98.

    Did Wikileaks scare the Bank of America to come clean as dead-beat?
    The Bank of America is the largest US bank. It has announced that it expects the TOTAL write-off of its rotten mortgages to reach the substantial sum of 5B dollars.
    The bank has also agreed to pay $1.28B to Freddie Mac (FMCC) and $1.52B to Fannie Mae (FNMA) in order to buy back TOXIC mortgages.
    The Bank of America also expects to take provision of about $3Bin the fourth quarter of 2010 to cover bad loans sold elsewhere. The Bank of America appears to be attempting to resolve the faulty mortgage loan fiasco - usually packaged and sold as bundled derivatives.
    Bank of America Chief Executive, Brian Moynihan: “Our goals remain the same: put these issues behind us; focus on serving customers and clients; and continue to help distressed homeowners facing difficult times.” The agreement will supposedly settle the issue of bad mortgages sold by Countrywide Financial that came with inherent RISK FROM TOXIC MORTGAGES. Private investors have taken legal actions against Bank of America to compel it buy back mortgages sold ELSEWHERE ON THE OPEN MARKET.
    Mortgages did not keep to the underwriting policies of government-sponsored enterprises of FNMA and FMCC. Bank of America and other former Countrywide executives are facing law suits over attempts to force lenders to buy back loans that may have been made with incorrect data re income & home values.
    Last week, the US largest home and car insurance company, Allstate, sued Countrywide for miscalculating and misrepresenting the risks on more than $700M mortgage securities.
    Bank of America's sub-prime mortgage unit, Countrywide, has cost the bank more than $5B in write-downs over the previous two years. I question the words: "has cost" because I'm sure Countrywide did not act in isolation.
    This is part of the US dead-beat pattern. If companies foreign or otherwise have derivative bundles or credit default swaps on their balance sheets, they must examine them, get them off the balance sheets, and take appropriate legal action against the financial institutiuon that sold them.

  • Comment number 99.

    #37 >>The FED should simply let it be known that it would punish any such speculation by heavy buying, making it expensive for speculators to unwind their positions.

    Easier said than done. What will the Feds use to "punish" the speculators when they have no *REAL* money to pay for their purchases ?? Or are you saying that they will default on the debts ?? That would do the trust in the US$ *NO END OF GOOD* !!

  • Comment number 100.

    #41 >>So other countuires have defaulted before and are now OK

    The main difference is that other countries that have defaulted before have not insisted on their currency being *THE* Reserve Currency of the world !! When the country that controls the Reserve Currency defaults on their debts, no one will ever trust them again !! Losing their Reserve Currency status will harm the US$ more than anything else !!

 

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