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OECD Choices: Death By Economic Austerity Or By Debt

Economics / Global Debt Crisis 2012 Oct 15, 2012 - 06:43 AM GMT

By: Andrew_McKillop

Economics

MORGAN STANLEY SAYS
In late July, Morgan Stanley summarized the no-win that laisser-faire, or rather laisser-aller deciders committed to doing nothing rational, have created for themselves and for us all in any Developed Market, advanced industrial (also called postindustrial) country. MS said the choice of fiscal, economic, monetary and related policy was between the Scylla of chase-your-tail austerity and the Charybdis of sovereign insolvency. In a rapidly rising number of countries, now daily reality in Europe's PIIGS, both these no- hope choices are being operated: they are not mutually exclusive.


While it can seem like just another oxymoron, that is obvious, any peek into both equity and commodity markets, and the talkshops that run with them, shows that Herd Belief is hopeful. Austerity medecine seems to work, at least on other people, even if the IMF has allowed itself some public hand-wringing and doubts about the squeakily correct policy of impoverishing huge chunks of society, even further.  The Keynesian borrow-to-spend festival of zero interest money would appear to not threaten further growth of sovereign debt, nor the extremely logical result of sovereign insolvency. This again only happens to other people - maybe Argentina and Russia, but such a long while back in time.

MIRACLES ON DEMAND
The list of expected and programmed miracles is however lengthening, daily. First, this crisis bundle is set and presented as largely a developed-economy problem. This is not the case, it is global.

The IMF, primus inter pares claims the Asian Locomotive is still on the rails and steaming forward: the emerging economies, it says, need little or no 'fiscal tightening' to stabilize their public debt to GDP ratios. The mounting and daily evidence this is not the case does not merit IMF airtime, especially the main reasons why this ratio is growing: declining rates of domestic economic growth and declining export growth, even contraction of real export revenues after correction for IMF-undercounted rates of inflation in the emerging economies.

Second, the subject delicately wrapped as "employment destruction", and filtered into mainstream media under this wrap, is in fact wealth destruction and wealth confiscation. The OECD's negative-net-worth governments can only impose costs on the private sector, and this destroys jobs. The only details and questions concern when and how. Upstream for governments, and midstream for companies and economic entities, the options are asset confiscation, asset devaluation, explicit default or bankruptcy, surreptitious default (notably financial and monetary fraud), or conventional tax-and-tax tightening.

Probably the biggest expected miracle in the OECD countries is this programmed destruction of the economy is presented, by government-friendly media, as receiving across the board political support. All and any media-friendly and votable politician and political party is on board for this rout. Investors and consumers, employers and employees face a solid wall of No Alternative because decision-makers minimize political pain by not deciding.

When this produces the only possible and programmed result, the choices and options available shrink to two-only: austerity and Keynesianism, not either-or.

Due to No Alternative, economic incompetence, political cowardice, corporate crony capitalism and other well-known scourges, pests or curses the timespan for shifting to outright sovereign insolvency has been continually reduced and shortened. In Europe and the US this is now a permanent medium-term threat, always able to shorten further, but of course outside "the next 10 minutes" timeframe for market traders, brokers and their backers playing the pinwheels and slot machines of the 24/7 casino called "mature markets", and also called "the economy" by idiot media.
 
Economic or fiscal terrorism is also miraculous: unlike The Bearded One, now apparently threatening the little-known country Mali, in regions of Mali with a population density of around 2 persons per square mile (but both of them Djihadists), this permanent mass terror campaign is really dangerous. The outlook for fiscal policy and public sector finances is the terror threat. Called "uncertainty for investors" this leads to almost insane valuations for so-called "safe assets". Government bonds are a shocking example of this terrorism.

SAILING, ALWAYS SAILING
The Rod Stewart song hardly fits the Titanic trajectory. Morgan Stanley can talk about sailing between a rock and a hard place, and even add in the nicest of prose that it is basically impossible for OECD governments to grow their way back to solvency, but these governments are responsible for the fantastic and absurd default result that do-nothing produces. In a few words: National insolvency and monstruous recession which in no way will be limited only to OECD countries.

This Sunday Sailing mentality or psychosis has a large and growing number of hard-edged needs or requirements, extending far beyond blithe self-satisfaction by political, media and corporate elites. They include the big lies of perfect foresight, untrammeled authority, tolerant markets, accommodating central banks and a total disregard for political pressure from citizens and consumers. Market response is necessarily stealthwise and fundamentals foolish but so-called "safe assets" can only be cranked up to certain extremes, before they crack; the selling of all other assets - all other assets including equities - can only be operated stealthwise for a limited time, before they also crack.

The storyline from OECD governments that "we aren't broke but only seem that way" has been running strong, and ever stronger since 2008 but this also has limits. Tax receipts, in particular, tell a completely predictable, but supposedly "surprising and disappointing" story in almost every OECD country. Reduced outlooks for government receipts are inevitable when GDP does not return to its pre-crisis trajectory and trend growth going forward is lower. Comparing pre- and post-crisis trends for GDP underlines the inevitable: a permanent loss of public sector income.

Shifting the debt around, shell game style from private and corporate debt to public sector debt has a cost: it is presently estimated by the IMF as around $1750 billion net additional since 2008 in "those countries offering support". Because debt has been swapped rather than reduced, aggregate debt in most OECD economies is now higher relative to GDP than in 2008.

Previous sure-fire tactics for levering up apparent economic growth and levering down the apparent size of real debt have at the same time been torn apart by the choppy sailing conditions that do-nothing laisser aller policies produce. Escalating costs of Baby Boomer ageing and health care, which as part of the welfare policy growth system previously came in useful for hiding reality, are now outright liabilities with no counterpart spinoff able to be counted as economic growth and asset growth.

END OF THE SAILING TRIP
It is now clear that "growing our way back to solvency" is not going to work. The pernicious reversal of real meaning, in government-friendly slogans and one-liners, makes it commonplace to hear that "previous do-nothing policies", unlike today's pro-active policies, were sailing government ships towards the whirlpool of national insolvency. Today's pro-active newspeak is that "expansionary austerity" will work, especially in Europe. Several governments, for example of Italy and France, actually claim in print and out loud that the schizophrenic mix-and-mingle of austerity for most and free cash for selected corporate cronies, not only the banks but also a few hand-picked others, such as the Sustainable Economy crowd, heralds a New Age of Growth, perhaps by 2014 or 2015.

Instead, with leaden inevitability the austerity cure reduces growth, weakens the private sector including the banks, and further damages the fiscal position it was intended to correct. Borrowing continues, of course, but the chase-your-tail circus leads not only to recession, but to depression.

The inevitability of this is, with characteristic newspeak and hypocrisy, recognized by invoking the Asian Locomotive, high commodity prices, energy transition, sustainable development, climate crisis and even (why not?) the War on Terror. Somewhere, out there, the ships are sailing on a mirror-flat blue sea and Big Things can be done. At such times - more than somewhat reminiscent of the 1930s to economic and other historians - one reall dangerous spinoff is the search for War-and-Circus solutions to the bad news pyschosis that do-nothing policies can only produce.

Economic terrorism, including the threats of massive inflation, overnight changes of fiat moneys (internal or domestic debt default), wealth confiscation and destruction is now a clear line of OECD government business, although unsurprisingly not "communicated" this way. A natural counterpart of this terrorism is international conflict - not with Desert Rebels - but with creditor and debitor nations almost inevitably reverting to mercantilism as their national response to a no-win global context.

By Andrew McKillop

Contact: xtran9@gmail.com

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

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

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.

© 2012 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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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