It's The End Of The World As We Know It, And I Feel Fine
Well, maybe not fine, since the global economy is completely, totally, and irredeemably fucked (only a household debt jubilee can save us!). As we've been saying for a while around here, the future holds two decades, or more!, of deflation, defaults, bankruptcy, sovereign restructuring their social program obligations (Note that in the lingo of dominant creditor class, this is called "austerity" instead of "default" because the people they're fucking are poor and middle class). But let's start with a comment from the Economist magazine:
The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.
This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation.
Everyone get that? Let me just repeat that, "the defining struggle of the next generation." This is absolutely true. The creditors don't want to accept less that full repayment, and the debtors know that there is no fucking way in hell that they will ever be able to repay it. So, what happens? Well, the banksters trundle the world down the Road to Neoserfdom (read the whole thing):
On June 3, the World Bank reiterated the New Austerity doctrine, as if it were a new discovery: The way to prosperity is via austerity. "Rich counties can help developing economies grow faster by rapidly cutting government spending or raising taxes." The New Fiscal Conservatism aims to corral all countries to scale back social spending in order to "stabilize" economies by a balanced budget. This is to be achieved by impoverishing labor, slashing wages, reducing social spending and rolling back the clock to the good old class war as it flourished before the Progressive Era.
Somebody must take a loss on the economy's bad loans – and bankers want the economy to take the loss, to "save the financial system." From the financial sector's vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.
The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be "made whole" to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.
Pretty much right. And the result? First, John Hussman:
In short, my concerns about the economy and financial markets are escalating quickly. Given the already vulnerable condition of the U.S. economy, a second phase of weakness would most likely contribute to already troubling levels of mortgage delinquency and foreclosure, and could be expected to push the unemployment rate toward 12%. It is not useful to rule out unfavorable outcomes simply because they seem unpleasant or unthinkable. It is also not useful to place superstitious hope in the Fed and the Treasury to fix the consequences of irresponsible lending without any ill effect. In the coming quarters, remember that every time you hear an incomprehensibly large bailout commitment from government, it will equate to an unconscionably large extraction of public resources, possibly through overt taxation, but more likely through the long-term destruction of purchasing power.
I sincerely doubt, that we are going to a "long-term destruction of purchasing power," unless he means that people won't have any fucking money, and therefore can't buy anything, but he's right that we're about to head into the biggest leg down yet. Not to be outdone, however, is Paul Krugman:
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
[B}oth the United States and Europe are well on their way toward Japan-style deflationary traps.
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
Now look, this is all playing out very much as we thought it would over here at AFEP, but that doesn't make it good. Let's put what's happening in bullet point form as it is my preferred presentation method.
- We (the "citizens") can't pay off our mortgage, credit card, car, student loan, and other debt;
- The Government takes our tax dollars to make the banks and other creditors whole on the loans we can't afford to pay off;
- The Government then raises our taxes (not yet, but probably will) and cuts our social safety net to make up for the cost of making the banks whole;
- We (the "citizens") suffer a massive recession and severe increases in unemployment;
- We (the "citizens") - now because we don't have jobs or income - can't pay off even more mortgage, credit card, car, student loan, and other debt;
- Rinse, repeat, all the way down.
Of course, the way to cut off the cycle is to have the Government intervene at step one, and eliminate, or force a major write down of household debt, but, hey banks are in control of the government, and that might mean they would lose a few percentage points (or optimally, a lot of percentage points) to inflation. And we can't have that.
So, crack open that bottle of tequila you've been saving for a special occasion because the great unwind is here.
Cross posted at http://angryfutureexpat.wordpress.com