Over the coming weeks, we’re going to be hearing a lot about the ‘fiscal cliff’: the threat that some 5% of GDP is going to be ripped out of the economy in a combination of tax hikes and spending cuts. A fiscal slow-down on that scale will almost certainly trigger recession. The CBO thinks so, though their numbers look optimistic to me. (If you cut demand by 5%, more or less overnight, then you shouldn’t expect the economy to grow by more than 1% in the year following.)

The Feds solution to debt: more debt

Because the process of fiscal compromise acts itself out on the political stage – all big personalities and high drama – the media loves to report it. Loves to imply that vast questions are at stake, that political careers will stand or fall by the outcome.

But they’re not. Not really. This so-called ‘cliff’ is really just the first in a series of steps. The US budget is arguably the most distorted in the Western world. Greece and Japan may have higher debts, Italy and Portugal may have worse growth prospects – but for sheer budgetary insanity, the US is probably the world leader, combining huge current deficits with vast unfunded promises to retirees, and welfare entitlement program recipients. You don’t need to take my word for this. The IMF states, ‘under our baseline scenario, a full elimination of the fiscal and generational imbalances would require all taxes to go up and all transfers to be cut immediately and permanently by 35 percent. A delay in the adjustment makes it more costly.’

The political ructions of the next few weeks will simply constitute the first scenes in a drama that will run for the next ten or fifteen years. And what’s more, this is a play where we already know the ending. Taxes will have to go up. Spending will have to come down. No other outcome is available: just ask the Greeks.

And meantime, there is a monetary time-bomb charged and ticking. A bomb which is being constantly primed with further explosive, further destructive force. Remember that the economic catastrophe of 2008 was created by loose monetary policy, the indisciplined expansion of credit and a market where increasingly shoddy securities were sold as investment grade assets. You might think that a logical reaction would be the steady tightening of policy and encouraging a climate of credit discipline.

Alas, however, such logic has no place at the Fed. Interest rates are on the floor, and have been for four years now. Because four years of loose money isn’t enough for the ivory-tower academics in charge of monetary policy, the Fed has explicitly committed to keep rates low indefinitely.

Loose money in the past, loose money guaranteed into the future … but that’s still not enough. The Fed has enlarged its balance sheet by $2 trillion since the crisis began to unfold. But that doesn’t even say it. The unelected officials at the Fed handed out an extraordinary $16 trillion in secret loans to bail out banks and businesses in the 2008-10 period. Those loans were not known to, or authorized by, Congress and many of the recipients were firms owned and headquarter abroad. Sen. Bernie Sanders, who has much to call attention to these issues, comments, ‘No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president.’ Well, duh! It’s frankly extraordinary that there should be any question about this.

As Sanders also points out, the actual operation of the bailouts was largely outsourced in large part to investment banking firms on Wall Street who benefitted directly from the bailout. According to the Government Accountability Office, some two-thirds of such outsourcing contracts were awarded on a no-bid basis, an extraordinary failure. And meantime in a ‘money-laundering‘ style operation, the Fed is acquiring $40 billion of low-quality mortgage backed securities – in many cases from the firms that created and missold them – thereby cleaning corrupt balance sheets at the risk of the US taxpayer.

The problems created by this unconstitutional misconduct go far beyond the mere trillions of dollars involved. The US Treasury market is being currently manipulated on a heroic scale. At times we’ve seen the Fed buying as much as 70% of US government bond issuance. Worse still, it’s effectively told the market that it intends to continue supporting the market as much as necessary for as long as necessary. In effect, we have a tiny group of unelected officials pursuing a set of radical and experimental policies – QE infinity, money-printing, unlimited bond buying, call it what you will.

The impact of money printing and the value of the US dollar

And the theory behind this activity is simply crazy. When have price controls and state intervention ever worked? I don’t just mean for the US Treasuries market, but for any major market at any time? State intervention always fails. The Fed is simply setting up what looks set to be the largest Ponzi Scheme in history.

What’s more, because financial markets are interlinked, indiscipline in one market soon ripples through the system and unintended consequences impact many other markets. Wall Street traders, both currently and historically, price junk bonds off the US ten year treasury, which currently trades at an implausible 1.61%. But since the US Treasury market is flawed, every related market is too. As the Economist notes, a bubble is being inflated in government bonds, quality corporate bonds, junk bonds, and (I would add) global equities. As that newspaper comments, ‘When the market does turn everyone will want to head for the exit at once, as was the case with mortgage-related bonds in 2007. That might turn a retreat into a rout.’ I’d agree, except that the word might ought to be will.

The Feds exit strategy: Pray

And all this wouldn’t be so bad, except for one thing. What’s the exit strategy? Could it be hope-based by any chance? How do you climb down from these heights? Who will buy these bonds when the Fed stops? Who absorbs the losses? What exactly happens to the economy when interest rates normalize and bond prices collapse back to normal levels? Indeed, what happens to the banks when they can no longer sell their lousy assets to the Fed, can’t bump up their profits by selling no-bid services to the dumbest buyer in town? Too big to fail is still getting bigger.

The fiscal cliff is scary, because an abrupt one-off change in fiscal posture is a dumb way to do something that needs doing. But still, it needs doing. If a temporary economic slowdown is the price we pay for that, too bad. We’ll still be in better shape for taking the hit.

The monetary neutron bomb is worse. We’re still building it. No one’s talking about it. And the amounts are colossal.

Accountable: A letter in the Sunday Times called for Osborne to begin spending cuts a year earlier than planned

In February 2010, twenty economists published a letter in the Sunday Times calling on George Osborne to begin spending cuts a year earlier than planned. The key sentence of that letter stated that, ‘In order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament.’

The logic was clear. If you say you’re going to do something hard but essential, you need to do it at a credible pace. Saying you’re aiming to do something in five years time and after a general election is rather like admitting that you’ve no intention of doing it at all.

You probably agree with that logic. If you are in charge of your household budget and you notice that your expenditures are running ahead of your income, you’ll almost certainly want to address that gap right now this minute. It’s not pleasant doing it, but you do it anyway. Businesses think the same way.

What’s strange then is why those same economists have now reversed themselves. Just three of the original twenty economists are thought to stand by their original view. The Daily Telegraph will this week print opinion pieces from a range of other economists all calling upon the Chancellor to reverse course, slow down the fiscal tightening. Spend more, tax less.

Some of the specific ideas have real merit. Britain has an acute shortage of good affordable housing. Plenty of people would seek to buy a house if suitable properties were available at a vaguely sane price. Yet, as things stand, planning restrictions artificially restrict supply while the construction industry is staggering under its post-Olympic hangover. In principle, therefore, you could release demand and reignite an industry by changing planning laws so as to enable the provision of new homes.

Another good idea is widespread tax reform. The British tax system is too complicated and tax rates are too high. Simpler, broader taxes would allow tax rates to be lowered without any overall loss of revenue. The economy would surely benefit from such a reform. There would also be a huge boost to fairness, as the super-wealthy would find themselves having to pay tax instead of dodging it.

Bad plan: Certain other plans for spending cuts are just bananas, such as cutting stamp duty. Britain has long suffered from a huge property bubble, which is at its worst in London
So some of the ideas floating around at the moment are entirely valid. Some of the reforms mooted are obvious and overdue. But certain other ideas are just bananas. Cut stamp duty? Really? Britain has long suffered from a huge property bubble, which is at its worst in London.

A valid alternative? Alistair Darling wants new investment in power stations, airports and railways

Stamp duty is a tax that’s hard to evade and which keeps some kind of lid on prices. Abolishing the tax will just encourage prices upwards: a disastrous step backwards to the bubble economy of 1997-2008.

And higher prices will of course make it even harder for ordinary people to own their own homes, which should be a perfectly reasonable aspiration for working families in a twenty-first century democracy.

Other ideas are more marginal. Alistair Darling wants new investment in power stations, airports and railways.

He’s right, of course, that Britain’s infrastructure does look ragged compared with that of our European competitors. New investment makes good sense, in principle. But why should we expect the government to fund that investment? If there’s a market demand for new airport capacity, the private sector should be able to fund it. If planning restrictions get in the way, Osborne needs to look at the planning laws – he shouldn’t just pull his chequebook out. Same with the railways. Same with power. Those services need to exist, but they need to be funded by the people who use them. Any other approach is a reversion to the jam-today, pay-tomorrow culture of the previous decade.

This debate is going to rumble away for some time to come. Osborne will face a thousand calls from a thousand directions to reverse course, to back off, to ease the pain. But before you join that chorus, please just remember the position we’re in. According to the IMF’s data, the British government will this year borrow 8% of GDP. That’s £124 billion. Of every £1 that the government spends, about 18p is borrowed money. That’s plainly unsustainable.  If you look at all debt in the economy – household, government, corporate, banking – then our debt to GDP ratio is a terrifying 500%.

Those numbers were produced in April. Since then, the economy has deteriorated, the outlook darkened. That doesn’t make is less needful to get the finances in order, but more needful. This entire crisis – from the collapse of Northern Rock to the travails of the Eurozone – arose because of too much debt. Too much stupid debt. Urging George Osborne to borrow more for longer is like telling an alcoholic to use cider as a way to get through his whisky withdrawal pangs.

For the same reason, it’s sheer madness for the Bank of England to cast around for new ways to loosen policy. The IMF’s commodity price index has almost doubled from its early-2009 lows. London house prices are crazy. The financial markets are also at unsupportable levels. These things are certain harbingers of inflation – and sure enough, last month, the RPI inflation index rose again, to 3.2% and it won’t stop there.

You would think these things would act like a cold shower on policy-makers. That they would remind them of basic truths: that debt is bad, that fiscal responsibility matters, that money-printing is destructive. Instead, though, it sometimes seems that those in charge of policy will do anything but face the facts. There’s talk about changing the way inflation is calculated – the classic government dodge: if the facts don’t change, fiddle the numbers. Meanwhile, the IMF wants the Bank of England to cut the base rate from 0.5% to 0.0%, as though current rates aren’t already absurd. The lunatics are trying to take over the asylum.

But personally, I think George Osborne understands all this. He’s not a dummy. He gets that you can’t cut expenditure without causing pain. He understands that too many people are still hooked on the Ponzi-ish belief that we can enjoy things today and pay for them tomorrow. Over the next few years, George Osborne might not be Mr Popular. He may yet prove to be Mr Right.

Cassandra, in ancient Greek myth, was the daughter of King Priam of Troy. After Helen, she was considered the most beautiful woman on earth. Curly red hair, blue eyes, fair skin. (I know: she sounds more Irish than Turkish, but work with me.) Because of her beauty, the god Apollo fell in love with her and gave her the gift of prophecy. When she did not return his love – always a dangerous game when dating a god – he cursed her, ensuring no one would ever believe her prophecies.

But Cassandra saw it all coming: the Trojan war, the Trojan horse, the fall of the city and the slaughter of its citizens. She explained clearly and repeatedly what was happening. And no one believed her. Even after her early forecasts had proved to be bang on the money, still no one believed her. Even as the Trojan horse, bursting at the joins with Greek soldiers, trundled up to the gates of Troy, no one believed her.

Greece: We can’t see the 10-year depression just yet – but that doesn’t mean it’s not coming

So Cassandra feels like a good term to apply to people like me. (I’ve never been wooed by a goddess and cruel observers might suggest I’m very slightly past my physical peak, but I’m trying to focus on the prophesy side of things here. Work with me, folks.)

I’ve said for ages that the euro will fail, that the countries of the Mediterranean are bankrupt, that Germany doesn’t have the resources to fill the void, and that the Western world is entering not a recession, but a depression: a huge, 10-year, economic slump.

And here we are. If you look outside the city gates right now, I think you’ll find a giant wooden horse with a trapdoor in its belly. Because I’m a Cassandra, you won’t believe me of course, but I’ll give it a try anyway. That’s what I’m fated to do.

So number one, the interest rates on Spanish government debt are now heading up towards 8%. If you want to borrow money from the bank, you can likely do it cheaper than that. You personally may have a better credit rating than the Spanish government right now. In any case, a government can’t pay those punitive rates when its debt is gaping, its deficit out of control, and its economy in recession.

There’s muttering about a €300 billion bailout, which would keep Spain away from the financial markets for three years, but so what? For reasons I’m about to come to, I don’t think such a bailout could possibly happen, but even if it did, so what? Spain’s problem is too much debt piled onto a creaky economy. That €300 billion ‘bailout’ wouldn’t be a gift, it would be a loan. The solution to too much debt is not more debt. (And, for that matter, Mr King, the solution to weak money is not to print an endless supply of the stuff.) Naturally a giant bailout would kick the problem down the road, but bankruptcy is bankruptcy no matter when you meet it.

That’s point one. Point two is that Germany (and creditworthy northern Europe in general) is coming to the end of its borrowing capacity. There’s no reason at all why the German government should fail to meet its obligations, but it can’t be the Atlas that shoulders all the burdens of its southern neighbours too.

The ratings agencies have noticed this. Germany is now on credit watch for possible downgrade. If Germany commits to a monster bailout of Spain (not directly, of course, but via some Euro acronym), that downgrade would happen faster than Helmut Kohl could guzzle a schnitzel. Because Germany knows this, and because its citizens know it, those German purse strings are going to be drawn ever tighter as eurozone discussions progress. And quite right too. Germans have worked hard to restrain wage costs, export goods, innovate new products, and boost productivity. There’s no reason on earth why the fruit of those efforts should be handed out to economies which have steered a very different course.

Germany is now on credit watch for a possible downgrade. No wonder Angela Merkel is showing the strain

Point three: the terrible data, released today, about the British recession. I said we were in recession back in autumn last year. (No one believed me but, hey, I’m used to it.) And now we find that we’ve actually had three successive quarters of recession, with the last quarter the worse of the lot. Even if things turn up – and, pardon me for asking, but do you see any grounds for optimism right now? – we’ve still experienced the worst recession in British economic history. Not a bit worse than the Great Depression but, by now, very significantly worse.

Like I say, I’ve been saying all this for a while. Me and Cassandra both. The Greeks are coming. There’s going to be war. It’ll last for ten years. That wooden horse looks mighty iffy to me.

And no one listens. Maybe it’s nothing to do with being cursed by a God. Maybe it’s just the way with people who tell the truths that people don’t want to hear. But we Cassandras just go on prophesying anyway. There’s a big storm coming and it’s about to strike.

This was published in todays Daily Mail.

Those same finance ministers are also set to approve a year’s delay in the deadline given to Spain for reaching a budget deficit of 3% of GDP. That won’t, of course, be the last bailout for Spain and, please note, a budget deficit of 3% is still pushing debt ever upwards in acountry whose economy is getting smaller not bigger.

Unsurprisingly, government bond markets have once again been wildly unimpressed. Spanish bond yields briefly touched 7% today, before falling back. Given that Spanish debt (according to the misleading official figures) is around 7% of GDP and rising fast, interest rates at this level mean that about 5 cents in every euro are going to pay the interest on that debt.

The costs of euro collapse will be huge, but those costs are coming anyway. And they only get bigger the longer you defer the moment of truth

Put another way, Spaniards have to work about three weeks a year, simply to pay off the interest they owe on the national debt. No wonder their economy is failing under the weight of that burden. No wonder unemployment is so extravagantly high.

It’s time to end this massive Ponzi Scheme. If the problem is too much debt, you don’t solve the problem by extending more debt. If the problem is banks with irresponsibly reckless lending practices, the solution is not to “gift” them more money. If the problem is a wildly uncontrolled money supply, you don’t solve that problem by printing money until the presses are smoking hot.

A Ponzi Scheme is any merry-go-round fraud where you have to keep pulling new idiots into your scheme to keep things going. It’s the economics of the chain-letter. People can sometimes make money, but only if the supply of idiots is big enough. These things always collapse – and collapse disastrously – in the end.

We’re near that point now. Spain can’t receive a Greek-style bailout: all the EU rescue funds combined don’t have the resources to do it. Even if Germany decided to do all it could, the scale of these debts would simply overwhelm Germany’s (already very indebted) economy. In any case, if the fairies came and Spain were rescued, the pressure on Italy would soon become almost overwhelming. And though France hasn’t been hitting the headlines recently, it has higher debt than Spain, a history of deficits and a huge banking sector with vast exposure to Spain, Italy and Greece.

So why not let’s just call it a day? For Spain. For Italy. For the Euro. For this whole misconceived and duplicitous Ponzi Scheme. The costs of euro collapse will be huge, but those costs are coming anyway. And they only get bigger the longer you defer the moment of truth.

David Cameron wants to hold a referendum on Europe sometime after the next election. But he’d better get on with it. Europe, in its current form, doesn’t have that long to live.

I published this in the Daily Mail.

Meantime, over the same weekend, another rescue act took place. This ‘rescue’ involved €100 billion of taxpayer money (though not yours, fortunately) and is intended to bail out the worst Spanish banks whose balance sheets have been looking desperately fragile in recent months.

Global stockmarkets have been so relieved by the transaction that they leaped almost 2% on opening for business today. Let’s see how long that lasts…

Bailout: Eurozone finance ministers agreed to lend Spain up to $125billion to help its battered banks

Only, what actually has been rescued?  There are at least four problems with the Spanish economy at the moment. One, too much debt. Two, not enough growth. Three, a government austerity programme that’s been forced on the country by the first issue but which is severely worsening by the second. You can add a fourth issue to this list: a housing bubble that’s burst so badly, the construction and other ancillary industries will be decimated for at least a generation.

The first three of these issues aren’t just Spanish problems; they’re European ones. Germany itself is normally spoken of as an exception, but if so it’s a very partial one. The fact is that the Spanish government is less indebted than the German one. German growth which, despite everything, has been relatively healthy since the financial crash has started to stutter badly. And no wonder: it’s hard to sell to people without money.

Criticism: Spanish Prime Minister Mariano Rajoy has been slammed by Greece for the deal

But go back to that list of Spanish problems. Spain has just borrowed a further €100 billion. Forgive me for stating the bleeding obvious, but you cannot spend your way out of debt by borrowing more money. And let’s assume – a generous assumption this one – that Spain uses that money with prudence and wisdom, that it cleans up its dodgy banks, that it removes dead assets from their balance sheets, that good management is installed, that lending procedures are overhauled, that their capital base is made strong, that boards and shareholders learn to oversee their charges with intelligence and care.

Truth is, you only have to write that list to know that those things are never going to happen. The banks that got intro trouble did so by being incredibly stupid, badly run and forgetting every rule of sober banking. They aren’t about to turn themselves overnight into some shining examples of financial wisdom.

But, I’m an optimist, let’s assume a miracle happens and the banks come good. What then?

Well, so what? The burden of debt that Spain has to bear is still €100 billion greater than it was. The banks are hardly going to act as the engines of a new Spanish economy for two reasons. First, Spain is acutely short of credible international businesses to lend to. Secondly, the Spanish economy is shrinking not growing. Under such circumstances, intelligent bankers should be doing all they can to preserve their capital and avoid making risky loans. 

And how credible is the Spanish government as a borrower? We know what the international financial markets think: they think Spain is dangerously at risk. That’s why Spain borrows at some six and a half percent, when German can borrow at less than one and a half.

To be sure, this ‘rescue loan’ isn’t coming from the financial markets. It’s coming from ‘Europe’. I put ‘Europe’ in inverted commas, just to make it clear that the cash doesn’t come via any recognizable electoral or democratic process. Politicians and unelected officials have essentially conspired to make these decisions without the assent of their peoples.

 

Pain in Spain: You cannot spend your way out of debt by borrowing more money and banks are simply not going to act as the engines of a new Spanish economy

Would Germans, if given a vote, want to lend €100 billion to Spain? Would the Dutch? Would the Finns? And what would these people say if asked to give their verdict on the European Central Bank’s ‘LTRO’ programme, under which it has lent €1 trillion or more to European banks? Truth is, everyone knows what the outcome of any referendum would be. That’s why the people are never asked. That’s why these bailouts are effectively based on the theft of taxpayer funds.

Optimistic: Spain’s Minister of Economy Luis de Guindos said he hoped that companies would have more solvent banks as a result of the bailout

But back to the question. Spain is being lent €100 billion by baffling European institutions, without democratic oversight. Normally when loans are made under these circumstances, international lenders insist that some tough eligibility criteria are enforced, but in this case – no criteria.

It would be nice to think that Spanish politicians had proved their mettle to such a degree that no such criteria were required. But this is a government that has already missed its fiscal targets. That has long claimed no banking bailout was necessary. That has, in fact, already engineered one failed bailout (the one that led to the creation of Bankia and it’s shares are down 70%) and is now desperately seeking another. That has 55% youth unemployment, a shrinking economy, deep popular dissatisfaction and no proven ability to control its spendthrift regions. Oh, and one of the largest housing busts in the world. That’s the government which has just been given a no-strings-attached loan.

Britain, thank goodness, stands on the edge of all this. And of course, every new bailout, every new loan, every new increase in the tidal wave of debt, defers the problem a little longer. Deferring these problems isn’t smart, of course. Adding to the debt mountain only makes the fundamental problem worse. But that’s fine. Politicians only care about the next election. About keeping one step ahead of their voters.

Spain did enjoy a rescue act at the weekend, but it came from Fabregas’ boot. The faux European bailout has just made things worse.

This was published in todays Daily Mail.

It’s a strange world we’re living in. This newspaper reported yesterday that, ‘Britain and the US joined forces to urge Germany to create a central Brussels body that could assume sovereignty over individual countries’ budgets and fiscal policies.’

David Cameron and George Osborne are said to believe that ‘a single currency can only work if the Eurozone creates an effective fiscal union.’ Barack Obama is in on the act too. Everyone, it seems, wants a Euro superstate … except for Angela Merkel, the woman who’d be in charge of running it.

Now this seems like a simple story, only the more you look at it, the more it’s like one of those pictures where you have to count up the number of impossible things: fish flying through the air, roofs with no walls, water flowing uphill. And right now, we’ve got a lot of flying fish.

Point number one, a simple one. Germany can’t bail out Spanish banks. It’s illegal and unconstitutional. I know that democracy has taken a pasting recently – just witness an unelected Italian government or the almost total absence of democratic consultation over the fiscal stability treaty. (Take a bow, Ireland, for remembering that voters matter.) But even in these undemocratic times, the rule of law still matters. Germany is coming under acute pressure to break or bend laws passed in good faith. It is right to resist.

Secondly, another simple point. As a hedge fund manager, I’m charged with looking after money on behalf of my investors. It’s my job to make money when the markets are good, to avoid losing it when they’re not. And one of my rules is the oldest one in the market: you never double up on a losing trade. You don’t throw good money after bad.

That plain good sense has been altogether lost in recent times. Europe has too much debt, right? So what’s the solution everyone’s been talking about? Answer: more debt. Yes, sure, we’ve been hurling money – whether borrowed or printed – at these problems for the past four years. That solution has clearly failed … yet the answer, apparently, is to do the same again, only on a larger scale. That’s craziness, the very definition of insanity.

What makes it worse is that we see the same recycled advisers coming up with the same failed solutions. I estimate that, if you include guarantees, the co-ordinated money printing since 2008 has currently added at least $14trillion to the global money supply. That’s almost one quarter of world GDP. Does anyone really think that if $14 trillion hasn’t solved the problem, more money is going to do the trick? The problems and challenges have been getting worse, not better.

And third, don’t we live in a capitalist world? Where smart ideas are meant to make money, where dumb ideas lose it. Capitalism without bankruptcy is comparable to Catholicism without hell – yet G7 leaders seem ready to gang up on Germany for holding fast to this basic truth. If a Spanish or Greek bank has got itself into trouble by making bad bets with its shareholders’ capital, it deserves to lose everything. If the Spanish government wants to fix its financial system, it should do so with money belonging to its own taxpayers.

And finally, the Elefant in the Zimmer. Germany doesn’t have the money to bail out Europe. In the first place, its debt to GDP ratio is actually worse than Spain’s. It’s about the same as Britain’s, and we’re hardly in fine financial fettle at the moment. Furthermore, those ratios are based on the official debt numbers … which exclude, for example, any notion of pension liabilities, an area where Germany has massively under-provided over the years. The German economy itself is robust, but that country’s pensioners are going to need every ounce of that muscle for themselves.

Merkel is unwilling to bail out Spanish banks – which would be unconstitutional – despite the encouragement of the G7

Personally, I think Angela Merkel is resisting the G7 pressure for some honourable reasons. I think she doesn’t want to break the law. I think she believes completely in the law of capitalist consequences: that the people who make the mistakes need to be the ones to pay for them.

But she’s also a numerate, intelligent woman. She knows that Germany’s financial strength is far from impregnable. The country’s financial capacity is strong, precisely because she and her predecessors have taken care not to overload it – not to do to Germany what Blair and Brown did to Britain. I don’t want a superstate any more than you do. I certainly don’t want a British Prime Minister to be advocating the development of such a state. But fortunately, I think Merkel doesn’t want one either. Can’t finance it, doesn’t want it. Let’s hope she holds firm

I published this in todays Daily Mail

But, guys, there are some big issues out here. You know, real ones that affect real things in the real world. Issues that may shape the fate of the United States for a generation and more and that pose more peacetime danger to the national fabric than I have been aware of in my lifetime. Yet these things are barely being discussed: hardly spoken of, when we shouldn’t responsibly be talking of much else.

There are a huge number of dangers to pick from, but here’s my economic top 10:

1. The Eurozone crisis. The Eurozone is close to collapse. The euro, the world’s second currency, will in my view not survive the coming years, certainly not in anything like its present form. Europe remains a vital American trading interest. Our banks and firms are tied up with its creditworthiness and prosperity. And right now, that’s a little too much like being tied to an anvil. While swimming in the ocean.

2. Money-printing. The Federal Reserve remains committed to ‘monetary loosening’ at the slightest provocation. The list of disasters which that loosening has already, vastly, contributed to includes: the dotcom bubble, the housing bubble, the failure of the subprime mortgage market, the failure of Lehman, AIG, Bear Steans and their many crummy peers, a wildly out of control fiscal deficit, and much more. But Ben Bernanke would like to loosen whenever the opportunity presents. Financial firms are now QE addicted.

3. The fiscal situation “fiscal cliff.” The United States deficit is out of control. Senior, sane, respected economists regard the U.S. as being effectively bankrupt. The Congressional Budget Office’s own long-run forecasts of the national debt are hardly more encouraging. In the CBO’s words, “By 2021, debt would exceed 100 percent of GDP. After that, the growing imbalance between revenues and noninterest spending, combined with the spiraling cost of interest payments, would swiftly push debt to unsustainable levels.” [See page 13 of report]. They don’t use the word “bankrupt,” but it’s what they mean.

4. The costs of healthcare. I want a country that guarantees acceptable healthcare for all its citizens. I also want a healthcare system which doesn’t kill the federal government and threatens to suffocate private enterprise. Other countries manage this trick. Why can’t the United States? (Clue: possibly because our politicians prefer partisan sniping to constructive thought.)

5. The pension time-bomb. And while we’re on the subject of out-of-control public spending, why are our putative future presidents not discussing the fact that numerous state pension funds look to be heading for failure. Sure, that might feel like a state-level problem today, but when such problems become sowidespread and so dangerous, they start to become federal ones.

6. Tax insanity. I like small government and the price mechanism. Like it, vote for it, believe in it. But that’s quite a different thing from having a big government and paying for a small one. We’re in a fiscal hole and we need to pay our debts. That means paying tax. And, hey, the billionaires don’t even mind chipping in.

7. Wall Street. You thought that monster had been put back in its box? Come on, you didn’t really. JP Morgan is a supposedly well-managed bank. It is a well-managed bank in comparison with its peers. But it still just lost $2 billion fooling around with financial derivatives that it, of all firms, should understand: because it invented them. But no. Give Wall Street funds, opportunity adding in moral hazard… and it’ll always create a bomb. They get the bonus, you get the costs.

8. Lousy assets. And more broadly, there continues to be a frightening number of poor-quality financial assets floating around our economy and financial system. Mortgages that are underwater. What happened to Fannie, Freddie and the humongous guarantees? Toxic remains from the subprime collapse still sitting on corporate balance sheets — and still so radioactive, they glow in the dark. The Federal Reserve probably now has the biggest stockpile of these assets, by the way, and it bought them with the money that they curate on your behalf. Bet you’re pleased about that.

9. China. That the world economy hasn’t completely collapsed before now has been thanks to the growth-miracle that has been China. But Goldman Sachs and others are now slashing forecasts to 13-year lows. My own view is that China is pretty much ex-growth. The figures may not say as much, but in China figures and facts are two different things. (China’s financial and property markets have major problems of their own, but that’s another story.)

10. Political failure, public protest, unstable regimes. And the evil fruit of all these things – few of which are purely American in occurrence — are swelling into maturity across the globe. In Greece: riots. In Spain: mass protest. In Italy: disaffection. In France: a politics of non! In country after country, the old guard of politics are being swept aside by discontented — rightly discontented — electorates, but the new guard haven’t yet figured out that they might want to try brand new political strategies for these altered times. Strategies like, you know, telling the truth…

Would it be too much asking that we all start focusing on real issues? I am not holding my breath.

Facing a challenge: George Osborne

Flaky banks, a hideous deficit, soaring debts, public services that had become hooked on ladlefuls of new cash, and an economy that had become disturbingly over-reliant on a financial services industry of dubious value and uncertain profitability. Those are huge problems and no one could expect them to vanish overnight.

But we do have a right to expect visible improvements. On debt and the deficit, Osborne is making progress. It’s slow – slower than I’d like – but these things take time. Reforming the public services is going achingly slowly, but at least you can see a government keen to do the right things.

Elsewhere, however, what’s going on? Public sector austerity is a reasonable financial strategy, especially given wipeout in the eurozone, but it’s not a growth strategy. It’s the opposite of one. It’s an anti-growth strategy, which hasn’t yet kicked into full operating force but which has already thrust the country into the second dip of a double-dip recession I’ve been forecasting for six months and more now. (My book, Planet Ponzi, is still the best available map to the on-going crisis.)

Though the country may be starting to stumble out of recession now, you shouldn’t get excited. As austerity starts to bite at home, as the United States starts to tackle its own (awful) public finances and as our European friends continue to make a mess of their beautiful continent, Britain will be back on Recession Row within a year. You heard it here first.

And meantime, what is the government doing to energise growth? Or, rather, let me rephrase that: what in hell’s name is the government doing?

Well, there’s Project Merlin for one thing. That was a plan to get the banks lending again, to fire up those private sector afterburners and watch high-tech small companies blast us off to a different economic orbit.

Alas, the banks forgot to lend, smaller private firms are starved of cash… and even though we own the damn banks we don’t seem able to control their behaviour. Meantime, the government ‘investments’ in terminally-ill Zombie Banks still look horrible. And the bank’s bosses are still paying themselves insane amounts of money.

And then, for another Growth Strategy From Hell, try quantitative easing. The strategy is so dumb, a schoolchild could see through it. Don’t get too bogged down in the technicalities of how QE works. Essentially the strategy boils down to this: ‘Let’s print vast sums of money, slosh it around the financial system and see what happens.’ 

Well, I can tell you what happens. If you print money, it will eventually create inflation and do nothing at all to help small businesses grow.

If we had a banking system that was good at funnelling spare resources to promising business ventures, my verdict might be a little less scathing.  But we do not have that banking system and everyone knows it. So the most recent bout of quantitative easing (nicknamed QE2) delivers more or less the same quality of ride offered by the Titanic. A short colourful ride, followed by a journey to the bottom of the ocean. Just make you’re your cabin is close to the lifeboats.

Finally, there’s also the misreporting and the misrepresentation that has become a standardized exercise in ‘creative accounting practices’ across the Western world. Government debt currently stands at just north of a trillion pounds. But when the Government puts out its data releases, it states the figures after ‘excluding the temporary effects of financial interventions’. Huh? Just what exactly is that supposed to mean?

The answer: when we nationalised the banks we nationalised their debts. It’s true, of course, that we nationalised their assets too … but their assets were crummy, overstated and unsaleable: that’s why nationalisation was necessary.

What’s more, to talk about these nationalisations as ‘temporary’ is deeply questionable. Something is temporary if you take something into government ownership, clean it up, and quickly flip it. But RBS has been in taxpayer hands for years now and there is no prospect of any imminent sale. So that’s not temporary. In fact, RBS shares are nearly worthless.

Worthless: The state is unlikely to make money from its bailout of RBS

And do you want to know the extent of British government debts if we account for those bank debts the way any private sector corporation would be forced by law to account for them? And are you sitting down? The answer – according to the government’s own statistics – is an eye-watering £2,181 billion. That’s more than double the number the government (and most media commentators) routinely use. Unfortunately, it’s the only number that makes sense.

In summary, then, Osborne could have done worse. But he needs to do a whole lot better. He needs to understand the fundamental failure of the financial system to perform its function: the essentially modest one of funnelling capital to the people who can use it best. He needs to forget about QE as a strategy and he needs to set a new level of transparency and honesty in government reporting.

Osborne also needs to get government out of the way of entrepreneurs. There must be a bonfire of regulations and tax complexities that flames high enough to entice businessmen into risking their time and money again on new ventures. Britain used to be good at that stuff, you know. Somewhere in our DNA, we still have that memory of success. At the moment, sad to say, the memory’s fading.

This article was published in todays Daily Mail.