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The Coming Debt Meltdown.

The Sovereign debt crisis is finally exploding. As usual the Anti-Euro nutters are out in force- I see someone has let Ambrose Evans Pritchard out again- but just they always do, they totally miss the point.

Of course the Euro is in crisis, but it is not the Euro that caused the crisis- it is a level of government debt in Europe and the US and Japan which is simply not sustainable. It may well be that the Euro is damaged or even destroyed- through that causes more problems than it solves- but the crisis is: that Western governments have been living beyond their means for decades.

The bill is coming due- and this is a bill that embraces all the major currencies: the US Dollar, the Yen and the Pound as well as the Euro.

No where is safe: the US Federal government is poised on the brink of shut-down as the political deadlock in Washington deepens. The Japanese government is essentially leaderless and directionless, and the governments of Italy, Greece and Spain are under critical strain.

But the UK is hardly immune: total debt has more than doubled in less than two years- it now stands at a total of £2 trillion- nearly twice the GDP of the country. This is despite the coalition commitment to cut debt. Who knows what see of red ink we would have been looking at if Labour had remained in office?

The disastrous decisions to fund social welfare, pensions and health care from current revenue, rather than building up an endowment has crippled the economies of the West. Unfunded cross generational IOUs are scattered around like confetti. Few- if any- of these promises can be honoured. What seems inconceivable now is about to become a reality: the welfare state is going to collapse under the weight of debt. Pensions will never be funded, welfare payments will dwindle to worthlessness.

That is the reality.

And it is a reality that will soon be revealed in stark colours as the heavily indebted states, from Italy to the US start to default on their obligations to the markets. This is not a Euro crisis, it is a debt default on a global scale.

The consequences will be with us for decades. Yet, still, the political class in the West do not understand the iceberg that they are looking at. The attack on Italy is not coming because it is a member of the Euro, it is coming because the Italians can not sustain their levels of debt.

Neither can the UK.

The fact is that unless British debt levels are reduce now, they will be reduced for us, because the markets will no longer buy some sovereign debt at any price. If that happens to the UK- as it may happen even sooner in Italy and has already happened in Greece- then the choices for politicians will be devastating. It is now not a question of what can be saved- very little can or will be. It is a question of an entirely new system to finance our social contracts, and -whatever happens- that system will see a massively reduced role for government.

The second stage of the Credit Crunch crisis- analogous to the 1931 bank collapse, as opposed to the 1929 Wall St crash, in the Great Depression- looks now to be upon us.

August is a dangerous month for the markets, but then so is October...

Comments

Paul Twigg said…
"It is a question of an entirely new system to finance our social contracts, and -whatever happens- that system will see a massively reduced role for government.
The second stage of the Credit Crunch crisis- analogous to the 1931 bank collapse, as opposed to the 1929 Wall St crash, in the Great Depression- looks now to be upon us"

An interesting historical analogy, but wishful thinking. In fact if I were a liberal democrat of your mould I would be extremly worried that the world is likely to go in the opposite direction.

Let's take your historical analogy. In the 1930s, following the end of gold as the world's anchor of currencies, the world did not revert to a liberal-capitalist model, but instead reverted into economic &trading blocs, far removed from the trading systems of the 1920s, let alone that of the liberal-capitalist heyday of the Edwardian period, e.g. :

1. The sterling bloc of the British Empire with 'imperial preference'.
2.The Yen bloc of Japan and her 'greater co-prosperity sphere'.
3. The US Dollar bloc of the Americas.
4.The Franc bloc of France &eastern europe.
5. Germany/Italy- facists begin re-armament and any external trade was done via barter.

And of course totally outside any system of world trade was the Socialist Soviet Union.

Sovereign debt is not a new issue, albeit the sovereign debt problems of the 1920s and early 1930s, were a result of world war, rather than government spending on welfare etc and eventually much of this had to be written off. I suspect that this might happen in the coming decades, which is why the markets are so spooked.

Note also that the US, the home of liberal capitalist began the 'new deal' state intervention in the 1930s.

So if as you say the major currencies are all going to explode in our faces, then it is surely more likely that the world is going to revert to the above, or at least a varient of it rather than embrace full blown capitalism?

Ironically, it would be the world's largest offical socialist country, which would be the immediate looser if this were to happen.

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