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Strawberry Fields Finance, Debt Growth - Economic Contraction

Economics / Global Debt Crisis Oct 30, 2011 - 04:05 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleLong ago the Beatles sang that nothing is real but its nothing to get hung about. In the global finance system however, cracking sounds are real and able to mightily hang up business as usual.  Europe's sovereign debt financing charade has reached daily heights of unreality as the Greek crisis shifts to rising bond rates on Italian debt, with Spanish, French - and German - debt financing crises promised, or threatened for later on. Maybe soon.

The crisis summit held in Brussels, 26-27 October literally papered over the cracks, with a new 1000 billion euro financial stability fund. The fund is heavily dependent on leverage and possibly only has a "hard core" of around 120 bn euro, if that - good luck and the Chinese willing. If this rickety fund is cobbled together, and survives, it will be a Bad Debt fund to buy and hold sovereign debt which almost certainly cannot be repaid. As such, it will be a perfect counterpart to the US and European Bad Banks holding toxic private debt impossible to pay down.

Apart from the call for China to recycle some of its huge foreign exchange holdings in dollars and euros - while they still have value - the crisis summit set a 50% haircut on Greek debt holdings for European banks. The net effect is simple: it sets the Greek debt clock back about 20 months. A simple figure shows how the clock operates, with exact counterpart mechanisms operating on US federal debt and the sovereign debt of a string of other countries. The Greek debt crisis, for a country of 11 million inhabitants (2.2% of the European Union) is in fact so massive it can only remain out of control. The debt pile grew from around 210 billion euro in January 2010 to 397 billion in October 2011, although this second figure is disputed. The average monthly growth, higher near the end, was around 10 billion euro, close to 900 euro per month for every single Greek man, woman and child.

An interesting comparative figure is the cost of Greek oil imports, covering approximately 89% of Greek oil consumption (around 370 000 barrels a day). In summer 2011 the cost of this near-total oil import dependence was running at about 9 billion euro per year - Greek debt was growing at 10 billion euro per month. So much for "ruinously expensive oil import dependence".

A Culture of Negligence
Cutting Greek debt back by 50% sets the Doomsday Debt Clock back to end 2009, but in no way changes how the debt system grows and feeds on itself. In the Greek case, in other European countries, and in the US this process is made more certain by slow economic growth, rising unemployment, falling investment and shrinking government tax receipts, or what we can call "conventional austerity".

In fact this no-win endgane is due to pure and simple negligence. How sovereign debt got out if control in a string of countries is a long and murky story. It features corporate banking greed, but is basically due to pure and simple negligence.

This negligence was and is systemic. It stretches from the 17-nation Eurozone group's central bank the ECB downward, through Europe's high street banks, to those of the US and Asia who piled into sovereign debt financing at ever rising interest rates - subprime style. The culture of negligence then extends to Europe's 27 member state governments and European financial institutions, agencies and regulatory powers. All of them always acted too little and too late. All players applied a blind eye and a deaf ear to each and every alarm signal.

Bond traders and loan merchants in the banking and insurance sectors made a rich killing, racking Greek taxpayers for loans at 25%-per-year interest - but ended up with burnt fingers and a haircut.

Growth to the Rescue?
Whatever debt-strapped countries need right now this starts with economic growth, but this growth in no way has to be "conventional" and could or even should be de-growth in conventional terms. Paying down sovereign debt which only goes on growing, like Greek debt, is simple suicide. Paying down debts of the mountainous sizes they have reached is however equated by present political and corporate elites as automatically signalling the need for growth-sapping and socially divisive, economically negative austerity programs. The deathwish urge to fail is clear.

It is supposedly "unknown" that by strangling growth, debt will only grow again, explaining why downtown Athens is crowded with angry rioters and Global 99 Protestors do the same.

Attempts at cranking up austerity programs in the US, facing its own "Super Greece" debt growth spiral, and in other OECD countries will produce exactly the same economic and social failure, the same mass protests, the same endgame.

Basically we can have real growth - or fake growth.

The second is what we have had for as long as 15 or 20 years in most Old World OECD countries, with the "growth deficit" papered over by loans, credit, financial engineering and selective asset price explosions in sectors like housing and realty, dotcoms and telecoms, green energy, and any handy gimmick. This fake growth has sapped wealth and has gone on so long that not only the US dollar but also its also-ran rival called the euro have lost their value and credibility as the world's two-only effective reserve currencies.

The present global financial and monetary system has no way out but to change. This is certain. Only growth can save the ship but what kind of growth, and how ?

Short Fuze Economics and Politics
The coming change can be chaotic and destructive - even to the extent of sparking world war - or it can be enabled, led and channelled by real economic growth. Creating real growth, which is the sane choice, will however take an awful lot more leadership from political deciders that we have had for a long time.

Conventional economic "recovery" plans and programmes are based on first levering up economic growth, hoping that employment growth will follow; the alternative is for job growth to start first, and the economy can sort itself out, afterwards. This basic choice is increasingly open, on view, and on the table. As we will see, the push factors for action will now grow very fast.

If the conventional or classic model is left to rip in its time-worn way the menace of commodity price explosion is not a possibility but a certainty. We only have to look at commodity markets and see the lockstep relation of commodity price growth and equity price growth - in fact "crisis" now means several days on which commodity prices rise but equity prices turn south.

Commodity prices react to even the slightest sign of economic growth returning in the Old World OECD countries: oil prices barrel up, copper and aluminium prices shine, wheat, maize, rice and soy prices soar up in lockstep. The reason given by any trader is simple: Asian growth. China and India have 2.5 billion candidates for OECD-style personal over-consumption and waste, and have unbeatable export machines enabling them to undercut OECD producers and earn the foreign exchange needed to pay their commodity imports.

To be sure, their export machines depend totally on OECD imports - financed by borrowing and sovereign debts denominated in dollars and euro - and based on fake growth. Traders and economic soothsayers downplay this inconvenient truth, but it underlies exactly why China is flying to the rescue of debt-strapped Europe: to keep it importing Chinese goods ! What else ? How long will that number play ? Not very long.

Message Received but Not Understood
Commodity prices could in theory soar to unlimited and unknown highs, like they did in 2007-08, but exactly like the last time around massive price crash is quick and certain when the skids are kicked away from underneath the unsustainable make-believe "New Economy". This can only deliver 1930s-style economic crises, in reality. Its operating mode is to deplete all major natural resources and ransack the biosphere: which is well known, but talking about it no longer suffices.

We can be almost certain the message is not understood by our present rulers and deciders. Their search for restoring economic growth by "any means" will fatally resort to the only means they know - the kneejerk response of borrowing and printing confetti cash, launching the consumer hyper-consumption juggernaut, and then whining about the commodity price explosion which results.

Knowing this we should look at all alternatives and opportunities for creating real recovery, and urgently look at ways we can create a new world reserve currency able to replace the dollar and euro.

In conventional thinking, the only contenders for the role of a new and alternative reserve currency as the dollar and euro bow out, is gold and silver. In fact this is physically impossible, as we can work out from basic numbers on global money circulation, and world central bank stocks of gold, and yearly gold and silver mine output. There is no way a new "hard money" backed by gold and silver could be issued at an amount more than about 5% of the world's current M1 count of money in circulation, of about 50 trillion USD-equivalent, increasing at double-digit annual rates.

The currency implosion bomb is ticking, like the other Doomsday Clocks. All of them point to the same result: a vast slump in global economic activity.

If that is taken as rational and credible, creating jobs first and letting the economy look after itself in the wake of that socially and politically responsible decision is what we need right now.  Under this scenario, the loss of wealth threatened by currency implosion - almost total loss of wealth - would have a counterpart real growth system in place. It could be possible that we avoid the harshest-imaginable 1930s style austerity economy. Civil war would be less likely, as the economy only contracted and only certain industries shuttered, disaster could be avoided.

Mix and Mingle
To be sure, we are moving to a nexus where no country will gain. This is a lose-lose scenario but the loss limiting strategy is to mix-and-mingle policy and programmes, creating a new commodities-backed world reserve currency, keeping the dollar and euro or their post-crisis replacements for utilisation inside the US and Europe, regulating world trade and commerce on totally different and new bases. Currency controls can likely act much better than pure trade barriers, especially where creative and modern forms of barter exchange, called "offset trading" are given head.

Rebuilding confidence in national moneys starts with restoring national control on how much money is issued, who holds it, and what they do with it.

Growth is the only way out of the present mess, but redefining growth is as necessary as eliminating debt-and-deficit as the so-called Path to Prosperity.

Growth, this time around starts with job growth not bailouts for Bad Banks and Bad Debts. One thing is sure, this has to start very soon and has to work: No failure will be allowed.

Monumental changes are already in motion in the world economy. The European debt crisis and euro money crisis are real; the US debt and dollar crisis is real. Current political deciders have no answers.
Within as little as the next three years the system we know could completely implode and disappear. In that time span we will see the US and European government debt schemes fail, the euro possibly disappear and become a German money, and dollar purchasing power fall apart.

Inflation will take off and could become hyper-inflation, before the global economy implodes.

All of this is so easy to see that even a child will accept it: how is it our democratically elected governors and deciders cannot see it ?

Real growth is the only solution but the usual cop-out is that real growth is not possible "in the current context". This ignores the real driver of real growth: jobs. By creating jobs first, real growth can happen - not the exact opposite way around which is the conventional or classic, failed solution. Time is short and action has to start right away.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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