Tuesday, 16 August 2011

The age of debt: the party's over

What is the reality of the current financial situation in the developed world? Nobody knows but we have to discuss it and in the end a few people in a position to do so have to make decisions which will profoundly affect the material prosperity and security of everyone on the planet. Even the developing world depends on these decisions.

Here are the major factors which world leaders, from Europe, USA and China currently have to take into account.

  • Most banks in the world have been directly rescued from insolvency by tax payers in the major economies i.e. by government intervention; but the governments have bought bonds in the banks with money they do not have, i.e.'fictional money entered into financial computer systems.
  • Since the governments which have rescued the banks are themselves heavily in debt the banks will fail again unless international pre-emptive action is taken. In such a scenario there will be no, or limited, protection for depositors, whether they be individuals or institutions.
  • The major economies owing most money abroad per head of the population are the UK ($144,300), followed by the USA ($45,100) followed by the European Union ($27,900). These are approximate figures for last year.  These figures  are from the World Factbook (CIA), quoted in Wikipedia See comments below.
  • Within the eurozone’s 17 countries Greece, Spain, Portugal and Ireland have had serious debt problems. In recent months attention has also focused on Italy (spending deficit plus slow growth) and France (in that it has a lot of money tied up in the USA, which is more indebted than the eurozone).
  • Economic growth in both the USA and Europe is slowing down and this affects their ability to generate wealth as a means of paying off debt. Even Germany’s economy has recently stalled (0.1% GDP growth in second quarter of 2011).
  • China also has its problems. Its foreign market is declining, its population has growing inequalities and there are property bubbles in its major cities.  Its economy is still growing significantly (around 8% p.a.) but by much less than the world has been used to. Who will buy exports from the west?
  • The USA’s economic well being is reliant upon a debt reduction programme, upon investment in productivity-enhancing infrastructure, training and education and upon economic export-led growth.

If the eurozone breaks up, i.e. if Germany is unable to lend money to weak, indebted countries within the eurozone it could set off a major world banking crisis beyond the control of any government or governments. Nobody other than some speculators have an interest in this, especially Britain with external debt per head exceeded only by Ireland (over $0.5 million), which fortunately is only a small country.

One plan for keeping the eurozone together is for it to issue eurobonds from the European Central Bank. Anyone owning eurobonds would be able go have them redeemed from the joint resources of the 17 eurozone members. This would require some hard thinking and talking by the eurozone members and most of the money would come from Germany; but Germany could have more to lose than any other state if the eurozone collapsed.  In return the eurozone countries would have to give up some of their economic sovereignty.

China is looking for a safe currency in which to store its sovereign wealth and which it can use for international trade. Traditionally this has been the US $. But the eurozone is bigger than the USA and has less debt per person. So China it is likely to be fully behind any attempt to keep the eurozone in tact.

 If Germany and China can't rescue the eurozone another possibility is that strict balancing of the books would be enshrined in the constitution of each eurozone state, if not every state in the European Union.There would have to be a long lead in time (10 years?) but if agreement can be reached on this it could be the best solution. If Europe remained stable it would help the USA and China sort out own their problems.

Feedback welcome.

Author, 2077 AD