–One simple way of thinking about the world’s problems is that over indebtedness is overwhelming institutions at the periphery of the global system. A few years ago, that meant margin-lenders and non-bank lenders in America’s housing market being swallowed by bigger more traditional banks that were not financed by securitisation (think Rams Home loan here in Australia).
–But the banks weren’t well capitalised enough to withstand credit write downs so the risk had to be swallowed by an even larger party with deeper pockets (or access to your pockets). Gradually, risk of debt default has been centralised in a smaller number of institutions and governments, migrating from the private balance sheet to the public. Instead of being disaggregated, it’s being repatriated.
–Yes, it’s kind of a boring thought to begin the week with. But it may explain a lot of what’s going on in the moment. No one wants to take losses on bad debt and have a thorough reckoning of profits and losses. So the problem is passed on like a virus to the next biggest remaining party.
–An obvious example is Ireland (and Portugal, and Greece, and Spain). Ireland’s government agreed in principal over the weekend to a bailout fund from the European Union and the International Monetary Fund. The liabilities of Irish banks have become too big a problem for Ireland’s national government to manage without destroying its own balance sheet and credit rating in the process.
–At one level this represents a victory for multi-national financial companies over the traditional nation state. Ireland ceded power and sovereignty to the EU and IMF because its banks have held a gun to its head. The banks win and Ireland’s people suffer the consequences, with terms of surrender dictated by the EU and the IMF.
–Whether or not this model of submission finance (where the banks threaten to kill the country unless their ransom demands are met) is the actual design of the banks and/or the trans national organisations is a good question. It could be that some people want weaker nation states and stronger Supra States like the EU.
–In fact, that could be the case in Ireland. In June of 2008, Irish voters rejected the EU’s Lisbon Treaty. That treaty was itself a sneaky way of forcing a European constitution on Europe after major nations like France and the Netherlands had rejected said constitution by popular vote. For unelected bureaucrats, “No” never really means “No.”
— European parliaments ratified the Lisbon Treaty and thumbed their nose at popular opposition from the little people. Like medieval landed elites and clergy, today’s governing class is not interested in the consent of the governed. It correctly realises that it doesn’t derive its power from that consent, but from the power to throw people in jail for not paying taxes or for breaking any one of myriad laws which the State has erected in private and public life.
–The Irish constitution required another vote by the people on adopting a European constitution and the Irish, being rebellious at heart, rejected it. Naturally, European power brokers in Brussels moved ahead with the project of greater economic and political integration in Europe anyway. The democratic process wasn’t meant to be an actual referendum on whether Europe should become more “one.” The vote was just window dressing to give the European project the patina of respect from having been voted on by “the people.”
–But in the age of growing government power, the people don’t really matter, except as votes to be bought and tax serfs to be fattened and farmed. And now Ireland, whose banks are stuffed with bad debt, finds itself having to do what its told by the EU and IMF whether it likes it or not.
–By the way, this slow motion tyranny of the ruling elite bureaucratic class is just as true here in Australia as it is everywhere else. Here, it takes the form of a government refusing to cost a $43 billion national broadband plan of dubious worth. It takes many other bi-partisan forms too, of course. Here in Victoria, it’s the enormous number of spin doctors employed by the government (at taxpayer expense) to consult on public policy and cram all sorts of propaganda down your eyeballs.
–Don’t expect an end to Europe’s crisis, though. It will just migrate to the next nation with large public sector deficits and widening bond spreads (where investors openly doubt the ability of goverments to cut spending and address structural economic weakness). Portugal is already the red hot favourite for the next crisis. But the real issue is the same everywhere: too much debt at the local level and an institutional arrangement that guarantees each local crisis will imperil the viability of the whole European project.
–That’s what you get for trying to have one monetary policy of twelve different economies.
–Meanwhile, in America, the peripheral crisis is in with State and City governments. The Federal government can always monetise the debt through the Federal Reserve, printing money to buy bonds issued by the Treasury. City and State governments enjoy no such privilege. Thus, you’ve seen falling muni bond prices and cancelled offerings as borrowers fret about investor appetite for more debt.
–What does it mean? It probably means that California or Illinois is going to go bankrupt before Washington does. And when one or two states or ten or twenty cities go bankrupt, it will put more pressure on the bankrupt Federal government in America to “do something.” Like what?
–All of this roughly fits in with the idea we laid out in Friday’s subscriber-only update for Australian Wealth Gameplan: global growth is not going to come from debt-laded OECD countries. If it’s going to come, it’s going to come from the BRIICS. But those countries (Brazil, Russia, Indonesia, India, China, and South Africa) are sorting out whether they want to continue devalue their currencies (as they must in an export-driven growth model) or begin relying more on domestic demand and allowing for currency appreciation to stem inflation concerns.
–Speaking of which, Ben Bernanke had a go at China in a speech he gave in Germany on Friday. He said that, “For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.”
–He went on to claim that the running up of large current account surpluses destabilised global growth. And more importantly, he claimed that artificially suppressed currencies didn’t’ allow for the needed rebalancing in the global economy. It was Fed speak for, “You’re doing it all wrong, China.”
–That’s a pretty audacious claim for a man who’s taken U.S. monetary policy into completely unchartered waters and kicked off a migration into higher risk assets and commodities.
–Where does that leave Australia as we begin the week? Good question. The risk of China over-tightening its bank lending to contain inflation would definitely be bearish for Aussie resources. But for now, no one seems overly concerned that un-sound monetary policy is going to affect Aussie asset prices. Maybe they should be.
–Or maybe we worry too much. But we can’t help it. And what we ‘re worrying/wondering about now is if China, too, is at the periphery of the global credit boom, inasmuch as it created tremendous productive capacity to fuel credit-driven consumption in the West. What if a lot of China’s boom vanishes with the inevitable deleveraging and debt-deflation in the West?
–Hmm. That’s a lot to think about it. Let’s see what the market does and get back to you tomorrow. Until then.