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Fiscal Ruin Of The Western World Beckons - Telegraph

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http://www.telegraph.co.uk/finance/comment...ld-beckons.html

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.

Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.

"Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest."

No doubt Ireland has been the victim of a savagely tight monetary policy e_SEmD given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.

"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.

France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.

There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.

Such policies have crippled Japan. A string of make-work stimulus plans e_SEmD famously building bridges to nowhere in Hokkaido e_SEmD has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 e_SEmD beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.

Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary "shock and awe" through quantitative easing.

The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.

The Fed's doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

And Brown keeps on spending to preserve the workforce. Delusional and not sustainable.

I'm not sure anything can save us, I think the system is going to implode with massive defaults, there simply isn't the money to cover the debts or liabilities.

The global debt mountain is unsustainable.

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compounded debt trap....top phrase.

here are some others economists will be talking about soon.

spiral dive.

death valley curve.

overborrowed.

bankrupt.

the unbailed.

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http://www.telegraph.co.uk/finance/comment...with-gilts.html

Instead, the way this news has been spun, and the media's willingness to swallow that spin, fills me with despair.

Inevitably, I suppose, the CPI's dip below target has been presented as "yet more evidence" the UK faces a Japanese-style "lost decade" of deflation. The only escape, we're told by City economists and their pet commentators, is for the Bank of England to keep printing money and the Government to rack up ever more debt in order to extend yet more unconditional cash to our bloated banking sector.

This, of course, allows the stone-faced bank executives who caused this crisis to once again pay themselves huge bonuses. Now, though, said bonuses are being financed not by profits gleaned from over-hyped capital markets, but by taxpayers – namely you, your children and grandchildren.

Politicians are now talking about cuts. So gallingly obvious is the need for restraint that even Peter Mandelson last week admitted state spending will be reined-in. But all the main parties – in cahoots with their banking friends – insist such actions are for the future. So, for now, the UK's fiscal and monetary policy remains wildly expansionary – with the wealthy few gaining from that largesse while the general public shoulders the costs in terms of higher taxes and high future inflation. If such a state-facilitated wealth transfer took place in a country with hotter weather, we'd purse our lips and call it kleptocracy.

Why is it suddenly a good idea to spend our way out of recession and print money? The debate over the Bank of England's "quantitative easing" scheme – or QE – has been practically non-existent.

Those benefiting from QE – and the associated recapitalisation of insolvent, failed banks by the back door – have instead endlessly repeated the mantra "we simply must beat imminent deflation". In that context, the June CPI number bears closer examination – because it has about as much to do with deflation as Gordon Brown does with fiscal prudence.

The credit crunch has been in full swing since the summer of 2007. Yet June was the first month during that two-year period in which CPI inflation even fell below target, let alone risked going negative.

That's despite the fact that CPI grossly understates inflation. And had VAT not been cut last December, even the CPI would still be at 3pc – with the Bank writing a public letter explaining why inflation is so high.

The deflationists know this summer is the high water-mark in terms the validity of their argument. That's because it was in June and July 2008 that oil prices spiked above $140 a barrel – and lower fuel prices in the same months this year drag down the CPI.

During the next few months, though, these base effects will rapidly reverse. That's because oil plunged during the second half of last year – hitting $32 by December 2008. With crude currently above $60, and the futures market pricing-in a steady rise, it won't be long before instead of being 50pc cheaper than the same month last year, oil is 100pc more expensive. However, the numbers are rigged, that will push up the CPI.

This "inflation vs deflation" debate, though, is about far more than the methods being used to bail-out our failed banks in an opaque and deeply misguided manner. It is at the heart of the UK's future financial stability – and whether we can avoid the ignominy of being unable to roll-over our sovereign debt. Such a catastrophe would be second only to the two World Wars in terms of fiscal damage – and a bigger blow than Suez to the UK's national prestige.

Yet such a gilts strike looms. The danger signals are flashing. Since QE began in March, 10-year yields have risen as gilt prices have fallen – despite the fact that the Bank has spent £112bn of funny money buying almost half the gilts the Government has issued. And QE was supposed to stimulate the economy by bringing yields down!

Over the coming year, more and more recession-hit Western countries will be selling swathes of sovereign debt. But the UK is set to borrow twice as much in 2009 as France and Germany and more than three times as much as Italy.

That's why our political leaders must now state, extremely firmly, how we're going to cut spending and cut borrowing totals – and start the painful process of doing so. If we wait for an election, and endless reviews, the market could easily lose patience. And if UK firms and households are suffering from a lack of affordable credit now, the situation after a gilts strike would be many, many times worse.

Good article by Liam Halligan.

Two very damning articles in the Telegraph today.

Liam Halligan certainly appears willing to stick his neck out and put in black and white what other economists may think in private but are unwilling to state because they like the comfort of the herd.

Edited by interestrateripoff

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compounded debt trap....top phrase.

here are some others economists will be talking about soon.

spiral dive.

death valley curve.

overborrowed.

bankrupt.

the unbailed.

We're in a "death spiral" is my favourite when broadcasting our HPCdoom and gloom around.

VI spin is rebutted with "propaganda for the sheeple". When I tell those about to buy-yes amazing isn't it- that I and many other people believe that there will be a minimum further 30% drop that could ruin them :"So what , I don't plan on moving again.."

Any defensive rationalisation to get a house.

Nick

Edited by SurgeonGeneral

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http://www.telegraph.co.uk/finance/comment...with-gilts.html

Good article by Liam Halligan.

Two very damning articles in the Telegraph today.

Liam Halligan certainly appears welling to stick his neck out and put in black and white what other economists may think in private but are unwilling to state because they like the comfort of the herd.

We all know a crisis is coming, exactly of this nature.

Worrying that fear of leaving the flock now less than the fear of the wolf.

The wolf may be nearer than we know..

Nick

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Dammit!

I didn't quite believe in green shoots but I did think the worst shocks were over. Was gonna sell my precious metals and spend on a few whores! Damn!!

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Dammit!

I didn't quite believe in green shoots but I did think the worst shocks were over. Was gonna sell my precious metals and spend on a few whores! Damn!!

I think you'll find public banking shocks are just about over, or a cure is found through buyouts or bailouts very quick.

what they wont tell you is the real problems that accounting changes hide.

the problem is there, but it will appear that something else, the weather, El Nino, leaves on the line, Osama Bin Laden, is the cause, anything but illegal balance sheets at the bank...which are now legal thanks to Enron accounting.

Viva La Bonusa!

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I think you'll find public banking shocks are just about over, or a cure is found through buyouts or bailouts very quick.

what they wont tell you is the real problems that accounting changes hide.

the problem is there, but it will appear that something else, the weather, El Nino, leaves on the line, Osama Bin Laden, is the cause, anything but illegal balance sheets at the bank...which are now legal thanks to Enron accounting.

Viva La Bonusa!

It's just a pity these sort of acounting tricks can't be used by proper businesses it would stop a lot of problems from ever happening.

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Dammit!

I didn't quite believe in green shoots but I did think the worst shocks were over. Was gonna sell my precious metals and spend on a few whores! Damn!!

Looks like the whore price crash is going to pick up pace then?

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the problem ireland have is that they're in the euro.

Presumably, with their own currency they wouldn't give a shit about running a deficit at 15%. We don't.

But the EU banana measurers must require them to wreak havoc on they're own econmy just so that they can meet some utterly arbitrary fiscal targets.

oh well, on the upside, atleast the irish have had a proper house price crash, and it's only going to get better/worse.

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I think you'll find public banking shocks are just about over, or a cure is found through buyouts or bailouts very quick.

What they wont tell you is the real problems that accounting changes hide.

Think that's the focus of public head-scratching everywhere.

The whole property asset ponzi consisted largely of notional values, as property always does until it is actually traded. The peak values as well as the write downs were notional.

Did the banksters really lose or were they only notional losses? Because now we are hearing of 'write backs' and banks returning to profit.

While you might ponder this, the Government and the taxpayer debt is real.

Edited by copydude

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Fiscal Ruin Of The Western World Beckons

Yes yes, but could we please have some perspective guys?

Clarke & Haddin were still there at the close & looked relatively untroubled.

Tomorrow could be a stressful day.

It's not contained. :(

Edited by Laura

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the problem ireland have is that they're in the euro.

Presumably, with their own currency they wouldn't give a shit about running a deficit at 15%. We don't.

But the EU banana measurers must require them to wreak havoc on they're own econmy just so that they can meet some utterly arbitrary fiscal targets.

oh well, on the upside, atleast the irish have had a proper house price crash, and it's only going to get better/worse.

Au contraire - € will prove to their benefit.

Their immediate problem is in taking on the unions, who have declared that the government will fall in an instant if the recommendations for slashing public sector spending are acted upon.

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http://www.telegraph.co.uk/finance/comment...ld-beckons.html

"The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us."

Little scope for further monetary stimulus by cutting rates; presumably he's calling for more QE?

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Little scope for further monetary stimulus by cutting rates; presumably he's calling for more QE?

possibly. but in essence he's talkin nonsense. Revelling in debt hysteria....not understanding that fiscal stimulus is what's required with deflationary concerns exist. To remove that and actually cut spending or to be concerned about balancing budgets is totally backward thinking....i don't actually think it has many takers at the moment. The politicians are trying to assuage concerns from the msm by talking about cuts and slowing of spending for several years hence....presumably when the economy will have recovered sufficient to not require such a level of govt. stimulus.

But if deflationary pressures still exist there's no way they can cut spending year after year.

Edited by spivtastic

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Au contraire - € will prove to their benefit.

Their immediate problem is in taking on the unions, who have declared that the government will fall in an instant if the recommendations for slashing public sector spending are acted upon.

Eurozone workers can't take the "pay-cut-through-devaluation" option like Britain did, they have to take a nominal pay cut that's visible on their payslip and that could leave them insolvent or a least in great hardship, as debt payment and other fixed costs take a higher proportion of their income. Any union intransigence will come directly from this fact.

Non-eurozone workers who have borrowed in euros find themselves in a similar squeeze.

Edit: falling nominal incomes has to mean falling rents and more defaults, either from BTL landlords or from OOs themselves. Are we seeing the beginning of a self-reinforcing asset deflation, in a mirror image of the previous self-inflating bubble?

Edited by huw

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Their immediate problem is in taking on the unions, who have declared that the government will fall in an instant if the recommendations for slashing public sector spending are acted upon.

well atleast the unions are talking some sense.

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We all know a crisis is coming, exactly of this nature.

Worrying that fear of leaving the flock now less than the fear of the wolf.

The wolf may be nearer than we know..

Nick

The headlines and the debate is all about the "economic" crisis.However this is a gigantic barking up the wrong tree.

Make no mistake.This disaster about to unfold is a direct result of two political forces in the UK.

On the left we have the socialists of Labour.The Welfare State.Their ideology cant accept that individuals have any responsiblity in their lives,or life outcomes.The state must intrude.It must provide.They simply cant accept that benefits,in the end make people poorer.That the wefare state destroys the lines that run through society and hold it together.

The fact that the working poor pay huge taxes to the un-working poor that puts huge pressure on families,that in turn creates more welfare need.The viscious downward spiral.

On the right we have the Conservatives.An ideology that saw fit to close huge swathes of industry on an accountants whim.No thought to the fact by removing the living wage jobs of working class people they would ensure it was unfeasable to bring up children in a couple.A mine that was making a £2 million loss closed to create £50 million in benefit costs and associated burdens.

The truth is,the disaster about to unfold is the direct result of two flawed ideologies.The people were sold a lie by both sides of the political spectrum.The left gave away the workers created wealth to the idle and feckless.The right gave it away to vested business interests.

The results are the same.An economic crisis yes,but thats just the taster to the social crisis about to unfold.

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I feel the need, the need for Nuclear Holocaust. :ph34r:

It's the only way to keep your decking and Whirlpool baths. Not all bad though. A Nuclear Winter will at least sort out swine flu. :blink:

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