Friday, May 11, 2012

Waiting for the collapse

I've written many times before about the economic and financial crisis in which we find ourselves.  I've warned many times that things can't continue as they are at present, because no politician or government appears serious about addressing the fundamental problems involved.  However, I've never tried to forecast dates or timelines for what may happen . . . until now.

Essentially, I fear that the economic crisis has deteriorated to such an extent that recovery is no longer possible without some sort of major disruption.  The problems that require solution right now are so vast that there is simply no solution possible in the short to medium term.  This is affecting nations all around the world;  and because all economies are today interlinked to a greater or lesser extent, depending on the country, it must and will inevitably affect the USA as well.

To begin with, European voters appear blind to reality.  They are rejecting austerity, and electing governments that promise to keep on spending money (that they don't have) to sustain an (unsustainable) welfare state.  As Detlev Schlichter points out:

... the European mess is nothing but the inevitable result of government-stipulated aggregate demand. Easy money funded the Spanish and Irish real estate booms and bankrupted their banks and by extension their governments. Easy money allowed Greece’s political class to go on a borrowing binge that has now bankrupted the country and lured large parts of the population into zero-productivity, soon-to-be-eliminated public sector jobs.

Do you still want the state to ‘stimulate’ the economy? Be careful what you wish for.

The real culprit of high youth unemployment in Spain and Italy is not ‘austerity’, which hasn’t even started there, but a bizarrely overregulated and sclerotic labour market in which it is almost impossible for firms of a certain size to fire people. The incentives are thus stacked massively against hiring. Yet, in France one of Hollande’s election promises is not to deregulate the labour market. If I were unemployed in France I would not be counting my chances of getting a job over the next five years.

In France the state runs more than half the economy, yet Hollande promises not to privatize state-run industry. Where is the wisdom in that?

Yet, the statists and socialists are delighted.

. . .

This was not an anti-establishment vote at all. It was not a vote for change but a desperate vote for the status quo. Of course, the old elite deserved the sack but they were largely booted out not because people got tired of the old policies but because the leadership now finally admitted that they could no longer deliver on the old promises.

The established parties lost because they could not continue upholding the false promise that had kept them in office for years or decades, the promise to make the “European model” work. They had to admit that the European welfare state was now bankrupt. Kicking the can down the road is increasingly not an option as the end of the road is now in sight.

And the election winners were those who had the chutzpah to maintain that drastic belt-tightening and painful reform were not required but that the people just had to ‘stick it to the man’, who is Angela Merkel and sits in Berlin. The tactic is straightforward. Shoot the messenger!

There's more at the link.  Depressing, but accurate and informative.

Part of the problem, of course, is that even those paying lip-service to austerity measures in Europe have largely continued the spendthrift ways of the welfare-statists.  This makes a mockery of their promises to address the debt problem.  As Karl Denninger reminds us:

The simple fact of the matter is that there is no resolution to these problems until and unless budgets are reconciled with current taxes.  That's the beginning and end of it; that which we demand government provide in services, whether here or elsewhere, must be paid for with current tax revenues.

I know this is politically unpalatable but it simply doesn't matter -- addition hasn't changed its fundamental character ever in history, and neither has subtraction.

The sooner we stop lying to ourselves and governments stop lying to the people the better off we will all be.

Unfortunately, there is no prospect of governments stopping lying to their people about this.  That's because governments that have told the truth have been removed from office, by electorates desperate to avoid the pain that must inevitably accompany austerity measures.  Consider:

Basically, Europe's voters are lashing out against any politician or political party threatening to cut back the cradle-to-grave 'welfare state' to which the citizens of that continent have become accustomed.  However, despite their backlash against fiscal austerity, it remains necessary.  The Organization for Economic Co-operation and Development (OECD) advised last month that it was essential for nations to reduce their debt load.  The Telegraph reports:

The Paris-based international think-tank said that countries "seduced" into loose fiscal policy in the good times must bring down their deficits to 50pc of gross domestic product (GDP) by mid-century, to provide a safety margin against future crises.

Debt rose to above 100pc of GDP in some economies before and during the financial crisis, including in Japan, Italy, Greece and Ireland. In Japan, debt exceeds 200pc of GDP.

It warned the challenge would be huge, not least because of the drain on resources posed by ageing populations and the scars left by the financial crisis, but said more spending cuts and tax rises would be needed.

"In many countries, just stabilising debt, let alone bringing it down to a sustainable level, will be a major challenge," the OECD said.

"The poor state of public finances will require wide-ranging fiscal consolidation in most countries."

. . .

The OECD said governments should focus much of their consolidation plans on spending cuts.

"Given the currently high level of taxation in many OECD countries, which adversely affects economic performance, and the future spending pressures due to population ageing, a large part of consolidation should probably focus on cutting public spending and addressing the drivers of future spending pressures," it said.

Again, more at the link.

Trouble is, the main 'driver of future spending pressures' to which the OECD refers is the very welfare state that voters are desperate to preserve, protect and even extend;  and, as noted above, governments are finding it almost impossible to tackle this enormous drain on resources without being voted out of office.  We have the same problem in the USA, as I highlighted a few days ago in an article titled 'The 2012 Index of Dependence on Government'.  In that article I quoted the Heritage Foundation, which asked:  "Can this republican form of government withstand the political weight of a massively growing population of Americans who receive government benefits and who contribute little or nothing for them?"  I believe it probably can't;  so, unless those benefits are cut back to a reasonable level, we may face the de facto collapse of our current political system.

In that regard, please note that I consider both the Republican and Democratic parties to be part of the problem rather than part of the solution.  Both have worked to expand the size and power of the federal government, and the share of national resources it consumes.  There's a great deal of speculation about President Obama's second-term plans, and dark prognostications about how the powers of the Executive Branch have been deliberately enhanced at the expense of Congress and the Senate:  but I think a Republican president would be equally inclined to misuse his powers to the detriment of our democracy and constitutional republic.  There's not much to choose between the two major parties.  Both have spent this country into this mess, and neither shows any willingness to stop spending, even though we can no longer afford it.

Government borrowing and deficit spending are by no means the only problems.  Far too many companies and private individuals exist through their own 'deficit spending', borrowing the money they need to survive.  In another recent article, 'Of politics, economics and reality', I provided this graph showing the total debt load of the world's ten largest mature economies as of the second quarter of last year (the picture has grown worse since then, of course).

Note that government debt is only one out of four elements that make up each country's total debt.  In every case, corporations and households make up well over half of the total - sometimes vastly more than half.  Even if the government debt component were somehow magically to evaporate into thin air, corporate and private indebtedness would continue to shackle economic growth and development.  Corporate debt alone has now reached catastrophic proportions, as the Telegraph reports.

Businesses will need to secure as much as £28.5 trillion [almost US $46 trillion] to refinance old borrowings and fund new spending, raising major questions over the ability of the world economy to avoid a recession, according to a report from Standard & Poor's.

. . .

The scale of the refinancing required, as well as the amount of new debt companies must sell, could create what S&P described as a "perfect storm for credit markets".

The report continued: "Governments and banking regulators are now not as well placed to counter another perfect storm scenario given that they have already expended so much of their fiscal and monetary arsenal to mitigate the problems arising in recent years."

The consequences of this are already being felt in the rising cost of borrowing faced by everyone from the largest banks to homebuyers when taking on new debt or refinancing existing loans.

. . .

Anthony Peters at SwissInvest said it was likely there would "not be enough money" available in the coming years for companies to refinance and raise the amount of new debt required.

"There is not enough money on planet Earth to fund it all. We are living on borrowed money and there is no way of avoiding that," he said.

Fears over the ability of countries to fund their debt have caused borrowing costs to soar. This week, Spanish 10-year bonds yields rose above the 6pc danger level, while Italian bond yields have also jumped.

S&P said this is likely to only be the start of a wider credit crisis as national austerity programmes and sovereign debt fears combine to put "refinancing needs in jeopardy".

More at the link.  Bold print is my emphasis.

Note, in particular, Mr. Peters' bald statement that 'There is not enough money on planet Earth to fund it all'That's the exact and literal truth.  The worldwide requirements of business for funding over the next few years cannot be met - at least, not with current-value currencies.  They can, of course, be met by 'printing money', which in turn will almost certainly cause massive inflation that will wipe out the current value of those currencies.  This is precisely what the Federal Reserve and many other central banks are doing right now.  Hel-loooo, hyperinflation? - or will it be massive deflation instead, as economies collapse?  Economists can't agree.  My money's on the former.

To make matters worse for the private sector, governments show no sign of reducing the burden of over-regulation and bureaucratic obfuscation that threatens to strangle many businesses.  I can't possibly go into all the details of so widespread and all-pervasive a problem in this article, but here are three articles that will provide further information on the situation in the USA:

All three links offer worthwhile reading, and are recommended.  Europe, if possible, is even worse than this country when it comes to business regulation!

Despite widespread opposition to austerity programs, the brutal truth is that they're already here on a local and regional level in many parts of the USA.  I used to regard the Economic Collapse Blog as being overly negative, but I'm reluctantly coming to the opinion that it may be closer to the truth than I'd like to admit.  Its author, 'Michael', recently posted an article titled 'Austerity In America: 22 Signs That It Is Already Here And That It Is Going To Be Very Painful'.  Here's a short excerpt.

Most Americans tend to think of "government debt" as only a problem of the federal government. But that is simply not accurate. The truth is that there are thousands of "government debt problems" from coast to coast. Today, state and local government debt has reached at an all-time high of 22 percent of U.S. GDP. It is a crisis of catastrophic proportions that is not going away any time soon.

#1  The financial manager of the Detroit Public Schools, Robert Bobb, has submitted a proposal to close half of all the schools in the city.  His plan envisions class sizes of up to 62 students in the remaining schools.

#4  New York Governor Andrew Cuomo is proposing to completely eliminate 20 percent of state agencies.

#7  The town of Prichard, Alabama came up with a unique way to battle their budget woes recently.  They simply stopped sending out pension checks to retired workers.  Of course this is a violation of state law, but town officials insist that they just do not have the money.

#14  Oakland, California Police Chief Anthony Batts has announced that due to severe budget cuts there are a number of crimes that his department will simply not be able to respond to any longer.  The crimes that the Oakland police will no longer be responding to include grand theft, burglary, car wrecks, identity theft and vandalism.

#19  All over the nation, asphalt roads are actually being ground up and are being replaced with gravel because it is cheaper to maintain.  The state of South Dakota has transformed over 100 miles of asphalt road into gravel over the past year, and 38 out of the 83 counties in the state of Michigan have transformed at least some of their asphalt roads into gravel roads.

More at the link.  Very depressing, but also accurate.

David Galland of Casey Research wrote today:

... based on my own readings, and after spending the last two weeks in the company of a couple dozen very plugged-in economists, top-performing money managers and top financial analysts, my conclusion is as thus:

The world's largest economies, including the US, Europe, Japan and China are speeding for the equivalent of a brick wall. In short, I believe that before this crisis is over, we will experience the Greater Depression my dear friend and business partner Doug Casey has long anticipated.

In case that conclusion fails to communicate my current view sufficiently clearly, I will condense it as follows:

The world's largest economies are screwed.

. . .

Trust me, stating an opinion on the direction of the economy in such unequivocal terms troubles me. For starters, I wish my conclusion could be otherwise because no one likes to be a harbinger of doom. Mostly, however, I have long resisted adopting a set-in-cement position on something as wiggly as the future. In my experience, anyone who absolutely, totally buys into a particular future is almost always proven wrong by time.

Yet, as my quest for certainty unfolded, I could come to no other conclusion than that the world as we know it is headed for an economic catastrophe.

. . .

For the record, I have compiled a list of the ten largest economies in the world, and a reasonable assessment of their current situation follows in descending order by size of GDP:

United States – screwed

China – really screwed

Japan – massively screwed

Germany – pretty screwed, especially in that export economies take a big hit in a crisis

France – le screwed!

Brazil – somewhat screwed

United Kingdom – blimey, screwed, too

Italy – properly screwed

Russia – hardly screwed at all (lots of resources and next to no government debt)

Canada – pretty screwed, eh?

As concerning as it is to see how many of the world's largest economies are in trouble, the biggest problem of all is that the central bank reserves of virtually every country in the world are stuffed with US government IOUs masquerading as tangible assets.

So, what happens when the world's reserve currency enters collapse and the dollar turns into a hot potato? Don't know, but I'm pretty sure we'll find out in the not-so-distant future.

More at the link.  I can't argue with a thing he says.

Those living in the Weimar Republic didn't see that country's hyperinflation coming, but it hit them within the space of two years - and our economic crisis has gone on for four years, so far . . .  It's impossible to know exactly when things will turn sour, or predict how desperate attempts by governments to stave off disaster may alter the situation;  but I no longer believe it's possible to avoid the disaster that's bearing down on us.  I think it's only a matter of time now - in fact, I believe the process is well under way.  It's just been masked by the desperate 'quantitative easing' programs undertaken by the Fed and central banks all over the world.  However, even those programs are having less and less effect as the amount of fiat currency in circulation floods markets.  In particular, exchange rates are being drastically affected by such measures, to the economic detriment of the worst offenders (including the USA).

There's not much that 'little people' like you and I can do to avoid this mess.  We're going to be caught up in it whether we like it or not.  Those of us (including me) who are dependent on pensions or Government subsidies of one sort or another for our livelihood must face the very real possibility that they may no longer be available.  Alternatively, they may still be available, but be drastically reduced in purchasing power due to hyperinflation.  Those with jobs may find that they're no longer there, as companies contract further or go out of business;  alternatively, salaries and/or hours of work may be reduced.

I think it's going to be very important to band together with friends and family, and pool resources to keep everyone going.  Larger groups such as churches and social organizations will also be important.  Within such groups, those with jobs will have to financially support those without;  those who can cook, or clean, or do chores, will have to provide their services in exchange for such assistance;  and those who are more completely dependent on others had better hope and pray for relatives, friends and loved ones who are willing to support them.  In a mess like this, teamwork may be one's only hope of making it through the crisis.  If you haven't already established a support network, I strongly recommend that you do so as quickly as possible - and make sure that its members are all equally trustworthy.  No-one will be able to afford to 'carry passengers' who don't or can't contribute their fair share to the group (with the exception, of course, of loved ones whose mere presence is important).  If you find that your support group has one or more 'free riders' or 'schnorrers', I daresay they'll be expelled in pretty short order.  (I'm sure you'll find such people coming out of the woodwork as things get worse, trying to play upon your natural feelings of sympathy.  However, given the likely dimensions of the crisis that's bearing down on us, I think they'll find that such 'natural feelings' are in short supply!)

In particular, I urge you to build up reserves of food and essential supplies, not in fear of TEOTWAWKI, but in order to 'make do' if money runs short and you can't afford a trip to the supermarket.  It's no fun living on rice and beans, or macaroni and cheese, for a week or even a month . . . but it can be done, and it beats starving!  Similarly, a few extra toilet rolls or bars of soap in the cupboard may make all the difference at times like that.  As Theodore Roosevelt famously said:  "Do what you can, with what you have, where you are."  We may get very tired of the 'same old, same old' for days or weeks or months on end:  but 'while there's life, there's hope' - and we may be grateful for surprisingly small things when the economy's melting down around our ears!  Those who went through the Great Depression of the 1930's proved that.  May we be as courageous in adversity as they were, and learn from their example (because we're almost certainly going to have to follow it).



perlhaqr said...

Anthony Peters at SwissInvest said it was likely there would "not be enough money" available in the coming years for companies to refinance and raise the amount of new debt required.

So, I guess the big part of this I don't understand is, why do these companies all need to generate more debt like this?

I mean, I understand having the debt they have, and needing to pay it off, but... why generate more?

Peter said...

Part of it is to refinance (i.e. 'roll over') old debt that they can't afford to pay off. Another part is to finance expansion or upgrades to their operations (for example, a new factory, or re-tooling an older facility, or a credit line to fund exports, etc.)

Most companies don't operate on a cash basis. They fund their operations by lines of revolving credit. Money spent to produce goods is repaid by the income from selling those goods, whereupon more is taken out of the line of credit to produce more goods, and so on, and so on.

Those lines of credit are now drying up, as well as longer-term loans for specific projects.

MSgt B said...

Depressingly accurate.

I hope Germany and America come through as friends on this one...

Noons said...

The problem in Europe started 30 years ago when governments promised folks wouldn't need to save for retirement and illness - the state would pay. So they didn't.
And now that it's been proven the lie it was, governments want these same folks nearing retirement age, to somehow save now? But hang on: they are nearing the age where they cannot continue to earn money, how on earth can they possibly save NOW? What, they should conveniently just roll over and die?

Until governments accept this simple reality and sort a way out of it, the unrest and refusal to austerity won't stop. With good reason, IMHO.

As for the banks, Iceland is so far the only country that has done the correct thing: banks in trouble? Let them crash!
And lock up their management and the government bastards who colluded with them. It hurt for 2 years, now they are doing better than the rest of Europe!

One last thing: an economic doctrine based on the concept of continued, unrestricted, unlimited growth, can only be sustainable in the mind of an economist.

There is no such thing as unlimited growth. It cannot possibly be the driver for economic progress: it's just not sustainable!

Once these simple facts are acknowledged and someone starts working on a solution, things will get better.
Otherwise it'll be a LOT worse. And inevitable.

DaddyBear said...

The line that keeps going through my head is "the lights are going out". When this wave crests, it's going to be very ugly.

MrGarabaldi said...
This comment has been removed by the author.
Anonymous said...

What a well-researched and well-written post. And you're right -- we're facing certain collapse. I've been writing about it on my blog for a bit now. I just hope I don't have to be here to watch the fall.

"Hel-loooo, hyperinflation? - or will it be massive deflation instead, as economies collapse? Economists can't agree. My money's on the former."

I concur. As governments run out of money politicians will try to push off the inevitable by printing more money. That money will, of course, be used to pay for the same social programs that caused the problem in the first place. It is the nature of politicians.

"governments show no sign of reducing the burden of over-regulation and bureaucratic obfuscation that threatens to strangle many businesses"
That, too, is the nature of the political process. Politicians need to reward their cronies and favorite groups with government jobs, and government workers tend to increase bureaucracy in order to justify their existence.

"there are a number of crimes that his department will simply not be able to respond to any longer"

Notice that drug "crimes" aren't on that list. The department no doubt funds itself in large part via civil forfeiture, which is basically police feeding off the civilian population.