DABERIAM LIII

January 2010

December and Christmas seems a long time ago and the new decade so far has a rather surreal feeling about it. We seem to be facing the reverse of the old adage: “if it ain’t broke don’t fix it”, as Governments and their bureaucracies are fundamentally unable to fix anything until it breaks. Europe in particular presents a bizarre picture where it is clear that the so called PIIGS (I left Ireland out of my last note) plus the UK are running Government deficits that are unsustainable. 

Britain is heading for a crisis with a Government borrowing requirement that is so large and compounding at such a high rate that it is too frightening to even try and work out how it is going to be funded and, in the run up to an election the politicians can’t even whisper that whoever gets into office is going to have to make draconian cuts in Government bureaucracy, to an extent that has never before been contemplated. 

Britain aside, the EU with its centralised bureaucracy, but no apparent political leadership is unable to propose a solution for the economically dysfunctional Mediterranean members. Greece, the current lightening conductor of economic debate is getting all the press. The publically discussed options are that it can painfully deflate its economy, be bailed out (it is not entirely clear what that means), or leave the Euro. The mechanics of painful deflation are in reality not politically possible in a democracy. Leaving the Euro is easy to say but incomprehensibly complicated and liable to lead to more anarchy than the deflationary option, and the mechanism for a bail out unclear and difficult to fund from the present EU Government mechanisms. 

The fourth option, which for some reason cannot be discussed, is old-fashioned Government default - a black swan event. It is difficult to see why this option isn’t the simplest and most likely. The Government bond holders take a haircut; the pain is felt domestically by savers and pension funds, the usual sufferers in an economic crisis. The Government then has the breathing space to reorganise its finances and will be able to usefully use new money from the European Central Bank. It is not obvious why the default of a small European area member is any worse than the default of a large corporate in any other country. 

This scenario, of course, while being discussed at the moment vis-à-vis Greece, could possibly happen to any of the other countries in the same predicament. Leaving Europe aside America continues to reinvent itself and restructure itself. Obama is proving to be a refreshing President and seems not only prepared to take on the big banks and the “Masters of the Universe” but also the political class in Washington. While the sparks fly in Washington and Wall Street, US manufacturing industry continues to grow in competitiveness. 

China, the leader elect of the Pacific Rim countries, continues to develop and focus on its plan to improve the lot of its people, a notion taken very seriously by the Government in Beijing, and use its economic power to gain political influence. The Government is careful and sensible in avoiding getting sucked into the global political debates and for the foreseeable future is unlikely to want to become one of the world’s policeman. 

There is a feeling of being part of a theatre audience waiting for Act II to being - Act I ‘Murder in the Banking System’ has been played out and we are left with two mysteries. Act II has begun with political sirens ringing and lots of rushing around of politicians in various parts of the world proclaiming solutions, slightly before the real problem has been discovered. 

The bodies that we can see are massive Government deficits which are not being addressed but will soon burst on the consciousness of Governments and Regulators, who are the actors in this scene. 

My apologies for stretching the analogy to the extreme, but until the deficit problem is brought home with a vengeance, the air cannot be cleared of the economic mismanagement of the last decade. Hopefully a year to eighteen months from now we will be able to look back on another short sharp economic crisis, and only then will we be able to get back to the economic and social improvements that need to be made to make the present decade a New Beginning.

Damon de Laszlo 
January 2010