The G20 has lost the plot – Ambrose Evans Pritchard

Well I’ll be!!!

I never would have thought that this day would come. This is the day I am going to disagree with AEP on his take of what is happening and what should be done about it. Little, old, insignificant, me.

AEP – ” Japan, China, India, and Brazil have all — to varying degrees — backed extreme stimulus to prevent the collapse of global demand.”

GR – By what feat of logic AEP can say that since everyone is doing something than it must be the right thing to do? Banks were making widespread use of SIVs over the past ten years; was that the right thing to let them do considering that SIV being off balance sheet entities were not subject to accounting scrutiny? Hedge funds proliferated in the past ten years and as they appeared to be so successful Funds of Hedge Funds proliferated on their back. Hedge funds escaped accounting scrutiny too and one would have thought that at the very least LTCM should have prompted some sort of scrutiny of the industry??? People were using the appreciation in the value of their homes in order to refinance their mortgages ever closer or even above the value of their property. Was that the right thing to do in light of the fact that everyone was doing it?

At what point is doing what everyone else does deemed to be counterproductive? How much more debt do individuals, corporations and/or governments have to take on in order for the lunacy of the whole debt based economy to dawn on more rational minds?

AEPNo doubt German Chancellor Angela Merkel is right – in a very narrow sense – that indebted countries cannot keep piling up more debt as if there was no tomorrow. But there is a deeper issue that seems to elude her entirely. Global demand is contracting. The deficit states (US, Spain, UK, South Africa, Australia, Greece, Eastern Europe) cannot – and should not – carry the main responsibility for keeping it buoyant.  That would merely perpetuate the vast imbalances that lie behind much of this crisis. So if the surplus states refuse to step into the breach, global demand will collapse. The mercantilist export powers are already being hit hardest by this downturn. Japan’s exports fell 49pc in January: Germany’s GDP has been contracting at 8pc or so (annualized) over the last six months, the worst performance of any major economy in the Atlantic region – although the bitter phase of mass unemployment is yet to come. This is the plain reality, whoever you blame for causing this crisis. Mrs Merkel – daughter of Lutheran clergyman — seems to have a moral view that somehow there are good imbalances (Germany’s surpluses) and bad imbalances (America’s deficits). This is frankly childish. The global economy is a single organism. All imbalances are bad when they become extreme. Until Germany (and China) comes to terms with this elementary point, we will not start to reconstruct the global system on a sound footing.

GRHere AEP starts by saying that it is in fact right not to carry on increasing debt and then launches into (what he feels is) a rationalization as to why this time we should take on even more debt. The astounding thing is that AEP is saying that we should expand debt by an order of magnitude because “global demand is contracting”. The reason global demand is contracting is because the expansion of a debt based economy has an inherent and mathematical limit. The limit is reached when even an interest rate of 0% does not allow private or commercial entities to take on more debt. At that point, to ask the handful of entities that have any spare cash left (the surplus economies) to “step into the breach” is irresponsible if not down right criminal. AEP is forgetting that the basis of capital formation is savings. In the absence of savings, you can only expand a debt based economy till the point at which interest payment matches revenue. At that point, the system must contract. This is not a matter of opinion. This is fact. This is arithmetic of the most basic order.

AEP – Brutal Method Two is the more radical option of a closed trade bloc that shuts out exports from mercantilists. That would be truly ugly.”

GR – I remember the days when mercantilism was encouraged, abetted and glorified because, amongst other things, it allowed Western corporations to go set up shop in low labor cost areas of the world and export their goods back to the consuming West. Now that the “mercantilist” economies whom, by the way, have re-invested part of the profits in the West and whom, to their credit, have set aside money for a rainy day, are being whacked upside the head because they have money and we dont… and we are the holders of the moral high ground????

AEP – “Governments and central banks were responsible for making credit too cheap – encouraging debt, and punishing savers. It was they who sent a warped signal to the markets, guaranteeing a warped response. Bankers were merely the agents, the expression of something deeper. This was a government-created crisis. It would never have happened in a genuinely free market. Let us never forget that. ”

GR – And here he loses me. In the first sentence he clearly identifies the culprits and, partly, the reasons for the debacle. Then he goes on to disculpate the bankers saying they are the victims of nasty politicians really. Then he finishes advocating free market. I’m ok with the first and second sentence. As far as bankers being enthralled to politicians, AEP is, in my humble opinion, being very naive. Finally, AEP advoactes free market policies but at the same time wants to force anyone who may have any capital left to throw it into the monetary black hole that has been building for the past fifteen years??? Has AEP ever given any thought to the possibility that maybe, just maybe, the little money that is left in the hands of a few prudent entities may not suffice to make good on the US$5oo Trillions of global obligations (low estimate of the BIS)? And if we throw the little money we have left into this boondoggle and it has no effect, then what?

The expansion of a debt based economy egged on by fractional reserve banking and fiat currencies, has a mathematical limit that is very real. Once at the tipping point, advocating the geometric expansion of debt is counterproductive and criminal. The sooner we recognize that the sooner we can come out of this jam.

The role of government should not be to foster expansion at all costs but rather to gauge and modulate the business and social cycles to alleviate the consequences of these cycles that have been a permanent fixture of human development for the past 7000 years. Recessions and, eventually, depressions do serve a purpose and have a social and economic role. Only arrogance and ignorance make for the former to turn into the latter.


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