MoneyTimes - December 8, 2010

Posted by Jill Kerby on December 08 2010 @ 09:00



The first Great Recession budget for 2011 has just been presented – but too late for this column’s deadline.  However, with an election pending we shouldn’t discount the idea that the next coalition government may decide, if not to throw this budget out altogether when they get into power, to at least tinker around at its edges, subject, of course, to approval of our IMF/EU fiscal masters.

While the main tax categories and cutbacks were well flagged, you now have before you the devilish details. Try not to choke on your cornflakes as you work out how your personal or family budget will be affected. Case studies of single people, couples, families, pensioners and other social welfare beneficiaries are set out in the all the national newspapers.

The budget is, however, just one piece in the bigger jigsaw that includes our on-going bank crisis and the loss of confidence of international lenders and the European Union in our ability and a number of other countries to sort out their debt problems.

Can all the tinkering at the edges of this great debt leviathan – ours, that of Portugal, Spain, Italy, Belgium - actually stop national defaults or even the collapse of the eurozone?

I share a simple theory (with the classic Austrian School economists) about why the efforts of the European Central Bank and the EU isn’t working: you can’t solve a catastrophic debt problem with more debt.  Not if you are an individual who has too much mortgages, credit card and other personal loan debt; not if you are a construction company or a bank that borrowed too much to fuel a property mania and not if you are a country that has to borrow to keep paying for salaries and services and social welfare benefits that were never sustainable without the endless stream of property tax.

The tinkering is now moving into dangerous territory – the stealing of the future earnings of citizens who aren’t even born yet, or the printing of new money from thin air.  They call it ‘quantitative easing’.

Either way, the lenders – represented by the bond markets - are wising up and are now charging higher and higher interest. 

But the lenders are discovering that it isn’t just Irish banks and the Greek and Irish states that are bust. They know this great debt problem runs throughout the eurozone.

The proof of this loss of confidence is the soaring price of gold and silver – real money.  Even the greatest creditor countries – like China - have a pretty good idea they’re going to get stuck with increasingly useless fiat currencies like the euro and dollar, and are shifting this money they hold into tangible assets – coal mines and oil wells, fields of soybean and wheat, yield bearing real estate as well as precious metals.

In September 2008 I read a fascinating essay ‘Exponential Money in a Finite World’ written by an American scientist cum financial expert called Dr Chris Martenson. You can read it here: www.chrismartenson.com

 ‘He wrote: “Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment.”

I think Martenson might now concede it could be a ‘short’, disruptive period of adjustment and that his theory of exponential debt growth is working even better than he predicted.

According to Martenson, when something keeps expanding by a percentage amount, “no matter how miniscule” it grows geometrically, or exponentially. A good example is a geometric growth sequence of numbers: (1, 2, 4, 8, 16, 32, 64, 128, 256).

When the same principal is applied to the accumulation of debt, fuelled by clever but hugely complicated forms of debt-based investment products, an amount of money, say a billion dollar pool of subprime mortgages, can rapidly turn into 10 million, then tens of millions, and then tens or billions worth of debt.  When enough of this bad debt accumulates, it can turn into trillions worth of debt and find it’s way onto the balance sheets of every major bank in the world.

That unraveling began in 2007-2008.  Poor little Ireland got caught up inadvertently, by grabbing big slices of all the cheap credit that became available. Anglo Irish Bank became a huge player and unbelievably, it may not only bring down a country, but maybe help to bring down a continent.

The game is up.  Time has run out. There is no silver bullet in the armoury of the European Central Bank and IMF to ‘solve’ the problem. With the help of the US Federal Reserve they can only ‘kick the can’ further down the road.

If Martenson’s theory is right – and it looks pretty sound to me – the endgame will happen sooner than later. We can either get to the top of the queue and try and negotiate a controlled default that will allow us to get the best debt forgiveness, debt repayment, currency devaluation, tax and trade arrangements so that we can rebuild the country and accelerate both exports and the attraction of outside investment.  (Time to brush up on our Portuguese, Russian, Hindi and Mandarin).

The budget may be our immediate concern, but that doesn’t mean you should take your eye off the bigger picture.  You might want to add Chris Martenson’s essay to your post-budget reading list. 

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