But here’s the thing. Do you care to guess how much J&J lost thanks to that currency movement? Answer: a cool hundred million dollars. Johnson is a pretty large company, but even so. To lose a hundred million bucks? In Venezuela? That sounds a little disturbing, no? A bit like the start of one of those killer-virus horror flick, where the pretty teenager who comes down with a benign little illness ends up dying horribly as some unknown disease takes hold.

Central Planners Bernanke, Draghi & Merkel Hard at Work

Well, that is now the reality of the world economy. The loose money policies at the world’s leading central banks are beginning to broadcast that virus right across the globe. The vector of transmission isn’t just low interest rates. It’s money printing too. It’s the purchase of government bonds so that the long end of the yield curve is as manipulated as the low end.

Indeed, you simply can’t set a bound on how widespread and intensive the destruction of value has been, not merely in the U.S., but across the globe. Take, for example, the Fed’s willingness to purchase toxic real estate assets — using your money to acquire securities which are now shunned by the market. Or take the Bank of England’s efforts to shove easy money at banks making corporate loans. What happened to good old-fashioned faith in markets? The belief that transactions of commercial merit will be struck between a willing buyer and a willing seller … and that any other sort of transaction should be strongly discouraged?

The simple fact is that the world’s major central banks are indulging in a massive proprietary trading scheme placing your money at risk in support of poor quality assets. When I wrote Planet Ponzi, I argued that Wall Street and government between them had created the world’s biggest ever Ponzi scheme. Well, the central banks want to play at that table too — and right now they’re the ones with unlimited money and zero accountability.

In recent months, the Japanese yen has plummeted 30 percent against the euro and some 20 percentagainst the U.S. dollar. Those figures are astounding enough in themselves, but get this: The euro currency probably won’t even exist in a few years’ time. The outcome of the Italian election gave a more than quarter of the vote to a comedian, Beppe Grillo. (He is literally a comedian; I’m not just using the term as a synonym for “Italian politician.”) Grillo wants to exit the euro and default on Italian debt. Other parties shared nearly all the remainder of the vote. The only politician to stand four-square behind Angela Merkel’s austerity ad infinitum plan was Mario Monti, who secured just one tenth of the vote.

Grillo’s plan, as it happens, isn’t dumb. The euro has been killing Italy, and though Italian debts are high, they are, for the most part, funded domestically and the national budget is not far from being in balance. So Grillo’s plan keeps it simple: quit the euro, self-fund the debt, go back to doing what Italian governments have always done. If that sounds nuts, bear in mind that Italy’s economy has been a post-war miracle — growing way faster than the U.S. economy, albeit from a lower base. Italy only really started to fail when it joined the euro: Meaningful growth has been absent ever since. Italy’s competitiveness — never so secure — has been systematically wiped out by its adventure with the euro.

If Italy follows a path that’s anything like the one Grillo has mapped out for it — or if civic unrest grows — or if some European bank found itself obliged to admit to the true value of some whole new pile of nasties on its balance sheet — then the euro is dead; but this is the currency against which the yen is devaluing.

The precise path of these currency wars is impossible to predict, but it’s not hard to predict the final outcome. First, there will be huge losses. Japan has an economy that’s almost twenty times larger than Venezuela’s. If Johnson & Johnson can lose $100 million in Venezuela, just how much more will be lost in the Far East and Europe, not just by that one company but by every other multinational one too?

Spain's civil disorder - A coup d'état in the air? Euro departure?

Secondly, civil unrest. We’ve seen bouts of unrest already surging across the world — from riots in Greece, to the Occupy movement, to the indignados in Spain — but these things are only going to get worse. Suppose, for example, that Italy does successfully quit the euro; what will that say to the Spaniards and Greeks and Portuguese and Irish who are currently suffering its death throes?

And thirdly: inflation. The trouble with currency wars is that they’re too easy to wage. You just have to print money. The mainstream media barely reports the ongoing activity and the Fed is either in denial or lying. It all sounds a little technical and dull. We assume that the people in charge of looking after our money supply are on our side, that they have our interests at heart.

But do they? Again and again, we see that central banks make the error of equating happy financial markets with strong economies — precisely the mistake that was made by central banks ever since the dot-com crash (and, indeed, before.) Here’s the simple truth. Financial markets prefer excessive valuations and excessive liquidity. Sure, they love it if the Fed prints a ton of new money. Obese kids would probably like it if McDonald’s gave away their stuff for free on street corners.

But the interests of Wall Street are not your interests. Global stock markets are making new record highs — on what? What’s so great about the world economy? The truth is that stock markets are up because of Fed-based ‘hopium’: the torrents of cash artificially manipulating prices. Yet whatever goes up must come down and no one at the Fed even pretends to have an exit strategy. The simple fact is that the Fed has created the mother of all asset bubbles, and the popping will be on a scale previously unknown.

Indeed, you only have to look at the personnel in key positions across the globe to understand how deeply Wall Street has penetrated institutions that were meant to be there for us.

Jon Corzine - What happened to MF Global's missing Billions? Who said there is no revolving door between Wall Street and Washington?

Mario Draghi, head of the European Central Bank is an ex-Goldman guy. So is William Dudley President of the New York Fed — who controls the FOMC. So is Mark Carney, soon to be Governor of the Bank of England, currently the Governor of the Bank of Canada as well as the Head of the Financial Stability Board in Switzerland. When you start to add in key politicians with affiliations to the same institution (Mario Monti, Hank Paulson, Robert Rubin, Gary Gensler, Jon Corzine), you start to realize that our entire political system has become heavily conflicted and corrupted. The interests of Wall Street have come to dominate the interests of ordinary citizens.

All Ponzi schemes must come to an end. They always bring disaster when they do — but that’s no reason to close them down, because the collapse only gets bigger the longer you leave them. We are in the end stages of a huge, global Ponzi scheme right now. The losses are rising, the risks are getting greater. And the worst disasters lie ahead.

The British calling in the calvary

A hundred years ago, a generation of men – many of them volunteers – fought an unprecedently bloody war for almost invisible gains. The men were heroes, but the generals commanding them were too often blunderers, too little conscious of the ever-mounting casualties. David Cameron is right to demand that our schoolchildren are reminded of the Great War and the vast sacrifices involved.

He’s right, but he’s also showing some chutzpah. History remembers those men as ‘lions led by donkeys’. Heroes betrayed by blundering and unimaginative leaders. We are not – thank God – at war on that scale now, but in economic terms we are deep in our own version of trench warfare and David Cameron has too little idea how to lead us out.

The current recession is the longest and (almost) the deepest in modern British history. Its costs are borne, primarily, by those least able to afford them. Those responsible for the damage – the bankers, the regulators, the New Labour generation of politicians – have been largely untouched. The fraudsters who manipulated LIBOR, who missold subprime assets, and so much else, are sitting in Monaco, instead of in jail. The politicians in charge now too often rely on soundbite and deflection; there’s still a shocking lack of transparency and accountability.

The British people bear all this with a huge amount of dignity. High inflation, stagnant wages, crazy property prices, an economy that seems only ever to move sideways? ah well, could be worse. Mustn’t grumble. We’re lions, led by donkeys.

What time is Murray Playing?

But it’s not just in Britain where an economic Great War is laying waste to lives and savings.

In the US, a presidential election is unfolding that will do nothing to solve the fiscal crisis that is engulfing the country of my birth. The fiscal problem has become so bad, the politicians can’t even talk about it. Republicans won’t raise taxes. Democrats won’t cut benefits. The result is a fiscal jam so bad that serious economists estimate true US indebtedness at over $200 trillion. That’s more than three times the total GDP of Planet Earth. And virtually no one talks about the issue.

In Europe, meantime, the latest rescue of the latest crisis is beginning to fail. Again. Spanish bond yields have fallen from their high of nearly 8.00%, but they’re still glued close to the 6.00% mark. And a country in deep financial crisis, mounting debt and deepening recession cannot fund itself at that rate for long. Meanwhile, the wealthy Catalans are beginning to reconsider their ties to the rest of Spain. The ratings agencies are cutting their ratings, again. Italy is in pretty much the same position, only a step or two behind. Germany is beginning to backtrack on the deals that averted the crisis that loomed earlier this summer. The slow-mo European crisis is getting ready for the next hideous encore.

Welcome to Spain - nearly 60% youth unemployment - this will not end well

 

 

You might think that nothing changes, but you’d be wrong. A year or two back, the IMF believed that a £1.00 cut in government spending would only reduce economic activity by £0.50, as new private sector growth surged into the gaps created. That clearly hasn’t happened. We’ve had the exact reverse pattern where increasing austerity has led to increasing recession… and an increased deterioration of government finances. The IMF now estimates that the same £1.00 cut actually depletes the economy by £1.30. The task ahead of us is getting worse.

It’s the same with the banks. Forget the pre-Thatcher miners or the teaching unions under Labour – if you want real government largesse, the financial sector still outshines the rest. When you hear of the Bank of England ‘pumping money into the economy’, what it is actually doing is propping up the trading profits of the same handful of bloated institutions that created this mess in the first place. And those self-same institutions are still not lending, the economy still not moving. Meantime, the stock of dubious debts and inflated assets rises just that little bit more. A burden that the rest of us will have to pay for: through absent growth, stagnant wages, high inflation, and a hopelessly unsustainable property bubble.

Amidst such confusion, it would be easy to think that there’s no fix out there. Easy and wrong. We don’t need rocket-science, we need common sense.

Although I don’t like a lot about what the current government is doing, I do like its approach to the deficit. Under George Osborne, the government is still borrowing 8p in every £1.00 generated by the economy. So when you earn £100 at work, the government has just borrowed £8. Since that’s obviously nuts, government borrowing needs to come down. At least Osborne has got that part right.

But then consider monetary policy. The Bank of England is widely expected to announce an expansion of its quantitative easing programme to £425 billion. Which is just a fancy way to say it’s printing £425 billion of new money, which is a sure fire way to create inflation. (Just ask Zimbabwe.) It’s craziness – or, in fact, craziness doubled, given that the intended effects of the policy (boost lending and encourage investment) have clearly not happened.

Or take the banks. It’s pretty obvious that bankers don’t need our sympathy. (Many of them, in fact, need jail terms.) Far from coddling the banks any further, we should force them to play by the same rules that all the rest of us have to live by. If a bank goes bust, it should be left to fail. Small depositors should be protected. Everyone else should get no sympathy. Instead, we pump money into the system and pretend we’re helping the broader economy. It’s insanity squared.

I wrote a book about these matters: Planet Ponzi, which is out now in paperback. That book tells you in detail, and in easy, everyday language, just how bad the problems are – and what we need to do to fix them.

I didn’t write the book because I wanted to make money, but out of belief – even passion. I’ve been involved in the financial markets for thirty years. Over that time I’ve seen a kind of sickness take hold. A belief in the power of debt. A belief that any problem is OK, so long as you can defer the reckoning. The sickness isn’t confined to Britain (though we are now the world’s most indebted country). The problem is equally bad in Europe, maybe worst of all in the United States.

The cure for this disease is, in essence, simple. It’s total transparency, total accountability. That needs to apply to politicians: no more false promises, no more evasions of responsibility. But the same magic formula needs to apply to banking and the media. And we, the voters, need to retain our sense of anger. When we hear politicians evading an important question, we need to demand a real answer. When we see bankers grossly manipulate the financial markets, we need to reject any outcome that does not end up with one or more bankers doing some serious jail time.

I first conceived of writing Planet Ponzi, when the first tremors of the financial quake were starting to strike. I thought the issues covered in the book were the most urgent matters facing the Western world since the end of the Second World War. I still do. It’s not too late to turn things around – but we can’t delay our actions any further. Planet Ponzi has got to stop. We still need our lions, but it’s time to lose the donkeys.

The post garnered a remarkable number of comments, the majority of which agreed strongly with the view I expressed. Just one thing disturbed me, however, which was the number of people who assumed I was taking a partisan position. To remind you: the article argued strongly for a full and open enquiry into the Fast and Furious affair. I guess a lot of people reasoned as follows, ‘The Republicans are bashing the Democrats over this enquiry, this guy Feierstein wants an enquiry, so he must be a Republican.’

I don’t blame people for making these assumptions. Our whole country has become infected with this kind of logic. Our entire political debate has caught the virus. Yet it makes no sense. No sense at all. Here are two facts and one conclusion. Fact One: A federal agent has been shot dead. Fact Two: there are allegations — which may be true or false — that the gun used to shoot him was in circulation only because of an ineptly managed operation conducted by the Bureau of Alcohol, Firearms and Tobacco. Conclusion: These allegations are serious enough to deserve an open investigation, period. Partisan bickering and political spin is simply a diversion from the action that a dead federal agent deserves — and the truth that the American people require.

I say all this because I’m about to call attention to another government department. That department is the Bureau of Labor Statistics. Now I know that Republicans are currently bashing President Obama over his jobs record. I know that Obama is bashing back. But, people, the issue at stake is the creation of jobs in America and the way those things are being recorded and reported. The issues I’m about to address were present under George W. Bush. They haven’t changed under Barack Obama. The depression which struck this country in the wake of financial crisis might have peaked under a Democrat, but it was born in a Republican era. If you yourself are so partisan that you want to make fine distinctions about these things, you should go ahead and make them. Me: I see two peas in a pod.

Good. Preamble over. Here’s the issue. The number of jobs created in America stood at 80,000 in June. That wasn’t nearly enough to budge the jobless rate, which remains stuck at a high 8.2%. (Mitt Romney’s comment: ‘another kick in the gut to middle-class families.’ Barack Obama’s rejoinder: ‘a step in the right direction’ whilst he acknowledged, ‘it’s still tough out there.’)

But let’s put the partisan spin-factory to one side, and instead have a think about the number of jobs being reported. Businesses are born and businesses die. When a business is occupied with either of those processes, it has better things to do than call up the BLS and discuss hires and fires. The BLS therefore estimates the net impact on the joblessness figures of the birth and death of businesses. You can read its full discussion here, but the key line says:

‘There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.’

A non-sampling method: that’s geek-speak for ‘guess.’ We don’t know how many new jobs are being created or lost by business churn, so we’ve got to guess. And you want to know the BLS’s estimate for the number of such jobs ‘created’ (net of losses) in June? Answer: 124,000. In May, the answer was over 200,000.

So, in crude terms, the net jobs growth reported by the BLS — the same one being lambasted by Romney and praised by Obama — is only in positive territory at all because of some number that’s simply a guess. A smart guess probably. One made by intelligent statisticians… but still. In this economy? With Europe in turmoil, China slowing, the country heading for a fiscal cliff which could thrust us back into recession, plus massive uncertainty over the path of healthcare costs per employee? The BLS has never been in this position before, because the economy hasn’t been. And after all, who in their right minds would be hiring new staff given these conditions? Most savvy businesspeople will be watching, waiting… deferring spending and hiring.

The truth is employment in the U.S. might be growing or shrinking. We just plain don’t know. What we do know is that if you add together the unemployed, workers discouraged from seeking work, plus those working part-time when they’d prefer to be working full time… you have an ‘underemployment’ rate of at least 15% — while our labor force participation rates are kicking around decade long-lows. These things are terrible economic news, but they’re terrible on a human scale too. Let’s consider the graduates looking to repay the more than $1 trillion in government-guaranteed student loans. These graduates are America’s future. Those BLS data points represent human lives, human potential. And the outlook is grim.

Vangelia Pandeva Dimitrova

To repeat, I’m not making a partisan point here. I’m making a bigger one. The American economy is in deep trouble. The reported data we have is unreliable. What we do know is that we have too much debt, too much money printing, a culture of total irresponsibility on Wall Street and consequently an absence of credibility in the financial and political promises that underpin our economy. All this, plus a political culture which is not addressing these things in a mature and responsible way.

This country’s in a mess. And partisan bickering will never pull us out of it. We all need to change our mindsets. I voted for change in the last election and I believe that today’s DC landscape is the most polarized in my lifetime. Are things better? Are we going to be offered a real choice in this election year? And where can I get a refund?

I published this article in today’s Huffington Post.

‘Frankly, we are not here to receive lessons in terms of democracy or in terms of how to handle the economy,’ he said. ‘This crisis was not originated in Europe; seeing as you mention North America, this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market.’

Hmmm. So evil Americans are responsible for European woes, huh? That’s an interesting claim, but does it really stand up? And who, really, is to blame for this extraordinary mess?

Who’s to blame? World leaders assemble for the G20 summit in Los Cabos, Mexico

In the spirit of Euro 2012, I thought I’d follow a system of ‘player ratings’. I’ve listed the major players in the Eurozone crisis below. A score of 10 implies, ‘Totally to blame. Why are these guys not in jail already?’ A score of 0 implies … well, it doesn’t really matter: there are no zeroes. Who’s to blame for the Euro crisis? Here are the major players with their scores.

1. American Banks 4/10

OK, I’m no fan of the US banking system. US regulators completely failed to enforce their own rules. The banks screwed up horribly and did a vast amount of damage to the the US economy. But there’s the point: they blew up the American finance system, not the European one. Get a map, Manuel. That big blue thing? It’s the Atlantic Ocean.

2. European banks 9/10

European banks, on the other hand, are vastly to blame for the mess in Europe. For one thing, a lot of the mess in the US was created by the US subsidiaries of European banks: outfits like HSBC, Deutsche, RBS. But then Societe Generale, Paribas, Lloyds, Northern Rock, Bankia, Unicredit, Dexia – these are all home-grown awful, and it’s their problems which have added so much to the European debt load.

Star performer: Greece must take full responsibility

3. Greece (Star Player) 10/10

Every team needs a star man, a Steven Gerrard, Captain Reliable character. The Euro-Blame Team has to name Greece as that €500 billion star. It cooked its books. It never even attempted to reform its economy. It doesn’t get its citizens to pay taxes. It offers crazy pensions. Its rail system notches up losses that exceed its sales. It has a mountain of Ponzi debt that, even after vast write-offs, will be unpayable. You can’t beat that performance. Greece: it’s ten out of ten, all the way.

4. Spanish Real Estate 9/10

It wasn’t so long ago that the Spanish state looked prudent. It had debt levels way lower than those of Germany. (Indeed, it still does.) Its economy thrived. It had a team that played beautiful football. What could possibly be wrong with this picture? Answer: a real estate bubble even worse than the one in America and Ireland. A bubble that Spanish regulators never even attempted to address. A bubble that is currently threatening to wreck not just the Spanish government, but the entire Euro project.

Spain is higher up the radar of international investors at the moment, but Italy is a whale of even larger dimensions. In the decade to 2010, do you want to know how many economies had worse growth than Italy’s? Answer: just two. Zimbabwe and Haiti. If you add to that terrible economic performance a mountainous debt and a corrupt and dysfunctional state – well, 8/10 seems way too generous. I must be Mr Nice Guy as it’s sunny in London today. Portugal, by the way, has somewhat similar problems, but the country’s size means I can’t award it more than a 6/10. Think of it as an impact sub.

6. France 6/10

France lies even further from international radars than its two big southern neighbours, but when you think about a highly indebted country with an exceptionally leveraged banking system, gigantic unfunded pension liabilities, an addiction to state spending, and huge assets parked in the not-so-safe countries of the Mediterranean … well, you probably don’t feel like putting your funds on deposit anywhere that smells of garlic. Stay away.

7. The European Central Bank 9/10

The ECB. What can you say? How Ponzi-ish, irresponsible, non-transparent and undemocratic can a central bank be? The answer, it seems, is ‘very’, four times over. The ECB enabled asset bubbles to form in Spain and elsewhere. It permitted a vastly overleveraged financial sector. And its response to crisis: to extend trillions of euros in soft loans to insolvent banks to gamble on dubious bonds issued by failing governments. That’s not monetary policy. It’s monetary insanity.

Damaging to Britain: But can Sir Mervyn King and Gordon Brown really be blamed for the eurozone crisis?

8. Gordon Brown & Swervyn Mervyn King 6/10

If we were talking about how far this pair of superheroes had injured the UK economy, we’d be pulling out perfect tens. But the question here is about the damage to the European economy and although Britain has been saddled with eye-watering debt, hideous inflation, rotten banks and a stagnant economy, those things have only a marginal impact on the Eurozone. That little strip of blue, Manuel? It’s the English Channel. (And don’t call it La Manche.)

9. Angela Merkel 7/10

OK, this is a tough one. Germany has a strong economy. It has weak and overleveraged banks, a scarily under-recognised pension problem, and too much government debt. But still. Angela and team didn’t create this problem, they’ve only compounded it. They’ve compounded it by always choosing to kick the can down the road, instead of addressing and fixing the giant issues in the European system. Germany’s not mostly to blame, but still. It should have done so much better.

10. Jacques Delors 9/10

Jacques Delors, the principal architect of the Euro, has admitted that the project was structurally flawed from the outset. He’s even admitted that British objections to the idea had real substance. (Thanks, Jacques, and it only took you 15 years to figure that out.) Basically, this project could never have worked and now here it is not working. Quelle surprise.

L’homme culpable: European Commission President Jose Manuel Barroso should take a look in the mirror

11. Jose Manuel Barroso 9/10

Manuel Barroso: if you have a mirror anywhere in your €1.4 billion offices, take a look. The person looking out at you is responsible for maintaining and boosting an impossible system. If EU officials had ever had any respect for democracy, this crisis would never have occurred. If the EU had ever recognised the real gravity of the crisis, if it had allocated blame and responsibility in the right quarters and in a timely way, this would never have happened. Manuel Barroso, l’homme culpable – c’est vous.

Meantime, and in light of the football theme of this article, I have a simple, neat suggestion to make everything right. Spain wants to be bailed out by the German taxpayer. German taxpayers, understandably, aren’t all that keen with the idea. But there’s a footie tournament on, right? Spain and Germany: the two favourites. So what about a simple little wager, double or quits according to which team fares better. And that’s a game I’d pay to see. 

I published this in todays Daily Mail

The United Kingdom has too much debt. Reports normally focus on government debt: currently around 80% of national income, unless you take into account (as you should) the debts of the bailed-out banks and their toxic portfolios, which would pretty much double that figure.

But what about consumer debt? Mortgage debt? Business debt? The huge slabs of debt incurred by our banking system? The truth is, if you want to know how much the United Kingdom owes, you need to add up everything.

And the answer is terrifying. We owe about 500% of GDP. So for every pound you earn in a year, someone, somewhere owes £5.  Add it all up and you get to a total just shy of £8 trillion.

Burden: Including bank bailouts, the UK’s national debt is already around 160% of GDP

You don’t have to be a rocket-scientist to figure out that this is a problem. Indeed, you’d have to be living under a stone not to have noticed that our economy has plunged into a depression because of this weight of debt. The banks started it, but we’re all in it together. And it’s not just Britain, it’s Europe too. And the US economy is way more fragile than is sometimes reported.

The dictionary definition of a depression is ‘a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle.’ That’s us. That’s where we are. The Great Depression of the 1930s did not destroy output to the same degree and recovery was faster. This is the worst depression in British economic history.

And what is the solution to this crisis, as cooked up between George Osborne and Mervyn King, the Bank of England chief? 

I love Wimbledon, it's Smashing!

George Osborne and Mervyn King have announced their intention to make around £100bn of cheap loans available to banks, allowing them to lend to businesses

Answer: more debt! Clearly, these wise souls believe that the whole problem with the British economy is that we don’t have enough debt. So let’s have more. In fact – and how’s this for a plan? – let’s make soft loans at cheap rates to the same klutzy British banks that created this mess in the first place and hope that somehow that sparks off a spiral of investment and innovation. You might as well plan for world peace by selling arms to the Middle East. (Or, come to think of it, making Tony Blair a peace envoy.) It’s the same crazed logic.

Fortunately, though, businesses aren’t stupid. The main barrier to investment isn’t the availability of credit; it’s the dire economy. Businesses are, quite rightly, looking at the devastation and lack of governance around them and thinking this might not be the best possible time to launch new ventures or expand old ones.

And the solution?  Well, there isn’t one short of de-leveraging. The only way to a problem of excessive debt is to have less debt. You can’t achieve that by waving a magic wand, you achieve it by working hard, paying down your loans, and remembering that, next time, you better keep your credit card in your pocket when you pass those nice, inviting stores.

But meantime, the plan does reveal something important about the decision-makers in charge of the economy. George Osborne I have some time for: at least he realises he needs to get the government to borrow less; at least he knows that the banks have to be tamed. But Mervyn King: what is he for? We are currently paying him to print money and shovel cheap loans at dodgy banks fueling a property bubble of epic proportion. 

Athens burns: Does this look like the creation of aggregate demand, Mr King?

Creating asset bubbles and money printing are terrible policies that King has become addicted to. He’s past his sell by date and has to go.
 

I published this in the Daily Mail

Shhhhhhhh!

But wait up. A hundred billion Euros? Lent secretly? On unknown terms and conditions? And the entire operation conducted by a bunch of unelected officials and scarcely reported in the media.

Please don’t think that these things happen in Europe but could never happen in the United States. They happen here all the time and on a colossal scale. Remember that Bloomberg fought the Federal Reserve all the way to the Supreme Court in order to establish that the Fed lent over $1.2 trillion to the US banking system and that those loans went ahead unbeknownst to and unauthorised by Congress. Oh, and although I say ‘the US banking system’ what I really mean is ‘any bank that puts its hand out for some cash.’ So the Federal Reserve considered it appropriate to hand over some of your dollars to such not-very-American institutions as the Royal Bank of Scotland, the Belgian bank Dexia, Credit Suisse, Deutsche Bank, the Italian Unicredit, and too many others to name.

Yet nothing happens. When Bloomberg broke its story about the Fed’s secret lending programme, a few other news outlets picked it up, but nothing changed. The same people are in charge of the Federal Reserve. They don’t think they did anything wrong. No central banker thinks that the ECB did anything wrong by handing a hundred billion euros to the collapsing banks of a failing country. It’s just the way these guys do business.

Just to be clear, though, there are alternative ways to do business. You might, for example, think that we should follow the following elementary rules: the central bank should avoid printing money and generating inflationary pressures which affect us all; bankers should lend money prudently and with proper due diligence; if those loans go bad, the banks should lose their money; and, over time, those banks are either left to go out of business (if they’re dumb) or encouraged to shape up and improve (if they’re not.) That system even has a name. It’s called capitalism. We had it in America once.

But not any more. We live in a world where moral hazard reigns supreme, where acts of gross stupidity seem to lack consequence. Where central bankers print money and no one cares. Where banks make dumb loans and get bailed out. Where politicians just want to get re-elected and know that the media is going to analyse the spin down to the very last molecule and leave the substance well alone.

Take some other recent news items. Facebook’s IPO saw its shares trade up to $45 before falling back to as little as $31, a fall of some 31%. It is alleged that Morgan Stanley, one of the banks running the stock offering, revealed data to its institutional clients that it did not share with its retail clients – data that, in effect, called into question whether Facebook’s high valuation could be justified. Morgan Stanley insists it followed every dot and comma of the relevant regulations, and perhaps it did. But retail investors have still lost a shedload of money. And Morgan Stanley and its peers have still made a huge amount in fees. If Morgan Stanley truly did follow procedures, those procedures are plainly inadequate.

Or take JP Morgan’s recent $2 billion trading loss. That arose in a bank which prides itself on its careful risk management. Which has lobbied vociferously against regulations which would prohibit the kind of activities which led to that loss. A bank which is surely ‘too big too fail’ – and in my eyes, therefore, also too big to exist.

Yet nothing changes. Just ask yourself these questions. Will the Fed never again extend secret loans to dodgy banks? Will Wall Street firms never again run an IPO that destroys billions of dollars in value for retail investors? Will Wall Street so clean up its act that it never again reports billion dollar losses because of dumb-but-greedy trades?

You know the answers. Nothing changes. In Europe at the moment, a calamity is unfolding. The Spanish bank, Bankia, has had its shares suspended as it seeks to apply for yet more state aid. The Spanish government, terrified by the way the ground is moving under its feet, is beseeching the Germans to help them borrow more money, so they can pass that money on to the same unreconstructed banks that lost it all in the first place. And meantime government deficits go on adding to the ever-less-supportable mountain of debt.

The United States is not yet in that position, but the preconditions are all here. An uncontrolled deficit. An out-of-control banking system. And politicians who would rather defer any problem than tell the truth about the mess we’re in.

This article was published in todays Huffington Post

But although the horizons are red with fire and every new day brings news and rumours of further catastrophe, you need to realise that we’re on the brink of something bad. We’re not actually in it.

So what comes next? It’s a question that you may reasonably ask (worried about job, savings, wages, inflation). But it’s also the question which is being asked across Europe: in the governments of Greece and Spain, those of France and Germany, by the central banks, by the banking industry – and indeed, by every private sector entity which touches those things, which is to say absolutely everyone and everything.

Expect a messy exit: A paint-spattered protester outside the European Central Bank

And no one knows. Or, to be precise, no one knows the exact way events will unfold, but there are some broad predictions which we can make with some confidence.

Prediction One: Greece will leave the euro. The ‘bailout’ offered by the EU was help of absolutely the worst sort. It was generous enough (just!) to prompt a beleaguered government to accept it. But the terms were so parsimonious that it left Greece still just inches from the financial disaster zone. It was as if the EU saw a starving man and chose to give that man just enough food to keep him from death, but not enough to permit recovery. If the Greek people are rebelling against the terms they were offered, they have my sympathy. I think they’re right.

Prediction Two: as Greece falls, the other weak countries of the Eurozone will come under intense pressure – worse than anything we saw even in the dark days of last autumn. Ireland (with its fundamentally strong, flexible and low-tax economy) will probably be OK. But the countries of southern Europe face some terrifying problems: weak growth, a woeful lack of flexibility, dodgy banks, and no fiscal room for anything except more austerity.

And the thing is, if you take a reasonably decent economy – Ireland, Britain, Germany – and impose austerity, it’ll be painful (it always is) but you know that the economy will, sooner or later, spring back into growth. The situation in the south of Europe isn’t like that at all. Italy, despite years of easy money, grew by just 2.5 per cent between 2000 and 2010. That’s not 2.5 per cent a year, it’s 2.5 per cent a decade.

The storm clouds are gathering: Greece’s departure from the Euro will place Spain and Italy under intense pressure

Or take Spain. Spanish growth looked good, but it was boosted by an utterly unrealistic reliance on construction – an industry which accounted for one sixth of the entire economy at its peak. Since Spain is now grossly overbuilt, that one-sixth is now pretty much dead and will never come back. Toss some brutal austerity measures onto these horrible starting conditions along with massive unemployment and it’s little wonder that the bond markets are nakedly terrified that they won’t get their money back. (Oh, and if you read that sentence and think, “serves the damn bankers right”, you might just want to remember that your pension fund is probably invested in those markets.)

Prediction Three, then: the failure of the euro won’t stop at Greece. It’s hard to say from here which country will be first to follow its lead, but I personally wouldn’t buy Spanish, Italian, or Portuguese bonds at anything more than 20-30 per cent of face value. (And that’s being nice: Greek bonds have lost much more than that.)

French President Francois Hollande was elected on an anti-austerity platform – but may struggle to keep his promises

Thus far, my predictions would be fairly widely shared among financial experts. Thereafter, it’s hard to read the future. Take, for example, the ‘simple’ question about what happens if Greece quits the Euro. Any business (and any bank) will have its liabilities denominated in euros, not drachma. Foreign creditors won’t want to be repaid in devalued drachma instead of the promised euros, so a wave of bankruptcies seems likely. Not just the government, but probably all of the banks, and countless businesses too. Naturally the Greek government will want to pass laws that reconstitute those businesses in double-quick time, but the scale of the task is Herculean. And the Greek government isn’t exactly noted for economic and administrative prowess.

Since the imminent failure of Spain and Italy would create problems far larger in magnitude, the ripple effect could be enormous. In fact, can you scratch that term ‘ripple effect’. There are no ripples here, only tsunamis. Just think for example, how France would be affected by the collapse of Spain and Italy. The French economy is deeply entwined with those two and their failure would bring the financial storms right to the steps of the Quai D’Orsay. Francois Hollande may have been elected on a no-austerity platform, but he might as well promise an end to gravity. So, Prediction Four: the French are about to endure a savage austerity programme of their own. And bonne chance in explaining that one, Monsieur.

Thereafter, what to say? The central banks won’t take any blame for creating more than a decade and a half of loose money and massively inflated asset prices. Politicians will continue to prefer comforting lies to brutal truths. No bankers will go to jail, even though they’ve done more than anyone else to create this mess. Germany will be fine. Britain too, in the long run, though it’ll be a long, slow slog: longer and slower than any of the official forecasts had predicted. And when even Ed Balls is still mulling the possibility of a British referendum on Europe, who knows how far the whole European project might yet unravel?

But these are big questions and perhaps distant ones. What about you? Your job, your savings, your pension? Well, I honestly hope and pray you’ll be OK. These are rough waters we’re entering. We ain’t seen nothing yet.

My article was published in todays Daily Mail

In normal times, that wouldn’t really be news. Sometimes interest rates rise, sometimes they fall. Sometimes savers lose, sometimes borrowers do. Swings and roundabouts.

Only – have you noticed? – these aren’t normal times. The Bank of England’s main lending rate has been glued to 0.5% for more than three years now. Because that’s not seen as a loose enough monetary policy, the Bank has also been printing money via Quantitative Easing. In fact, in relation to the size of our economy, the Bank has printed more money than any other central bank in the world.

Easy money: The Bank of England has kept interest rates low while also printing money

So at the most fundamental level, money is plentiful. It’s being pumped into the banking system so hard, it’s surprising that something hasn’t yet burst at the seams. Yet somehow banks think that, despite this astonishing level of state intervention on their behalf, they’re entitled to more. That they’re entitled to drive up your mortgage rate. That they’re entitled to charge you money in order to safeguard their bonuses.

Now, bankers will tell you these accusations are absurd. They’ll say that you can’t just look at the official rates. Crisis in the eurozone is making banks wary of lending to each other. The most widely used measure of interbank lending is the so-called LIBOR rate and those rates have been drifting slowly up from their previously unprecedented lows.

There are a few rejoinders to that, however. First up, it’s become ever more obvious in recent months that LIBOR rates have long been manipulated by the banks (something I’ve addressed in this column before). So for the banks to point to a rate which they themselves manipulate as a measure of financial pain is ridiculous. If they produce credible figures, I’ll listen. Until then, I’ve got no reason to.

Second, you need to remember just how vast was the extent of taxpayer support for the banks during the first phase of the financial crisis. Was and is. Government debt as a percentage of GDP currently stands at around 66%, if you exclude the impact of those financial interventions. But why would you exclude them? We did intervene. We are on the hook. Those interventions happened. So the true figure for British indebtedness is more like 141% of GDP – that’s not my figure, it’s the government’s.

The difference between the two figures translates to around £1 trillion. That’s how much of your and my money is currently at stake with RBS and the others.

Third, and despite their silver-tongued promises to over-credulous government ministers, banks are still failing to lend. They’re not lending to small businesses. They’re not lending to consumers.

If you go online and borrow money from Wonga.com you’ll find APR interest rates of 4214%. Those extreme and (in my view) extortionate rates couldn’t exist in a properly competitive marketplace. But in the gummed-up and uncompetitive market that we are stuck with, Wonga seems to thrive and prosper. And all this in an industry where, as the PPI scandal has proven, banks have absolutely no ethics, no concern for the customer.

QE Bubble: London property is overvalued to the tune of at least 22%

Finally – and worst of all – banks are still a huge source of danger for the economy at large. The London property market shows every sign of being another bubble. Property prices in general are much more likely to fall than to rise. Yet who, seriously, believes that banks would be safe in the event of a 20% fall in property prices? Given that the Economist global house price monitor suggests that British property prices are overvalued by around 22%, it might be safer to budget for a 35 or even 40% fall. Yet if that were to happen, can you even imagine the carnage that would be caused? I can’t.

Mervyn King once commented that he couldn’t understand why the level of anger against banks wasn’t higher. Sure, we grumble, but where are the boycotts? The mass protests? The insistence that we won’t pay another halfpenny in extra mortgage payments, until we get proof that no banker at these bailed out institutions has been paid a bonus in excess of the national median wage, that bankers themselves have put in the hard yards to cut costs, reduce risks and stabilise the ship.

That’ll never happen, of course. We’ll just go on grumbling. In the end, the bankers are right. We’re mad. And they’re laughing.

This was published in todays Daily Mail.