Defending Capitalism Against Old Europe's G20 Guillotine

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 |  Includes: DIA, SPY
by: Nadeem Walayat

Germany and especially France have fought long and hard against the Anglo-Saxon model of unfettered and weakly regulated free market capitalism for the past 30 years, and as a consequence of which have seen their economic power diminish in relative terms as the Anglo-Saxon capitalism model was adopted world-wide following the collapse of the Soviet Union.

However, following the ever growing fraud estimated at more than $10 trillion perpetrated by those running the world's major financial institutions that had brought the financial system to brink of collapse during September / October 2008, which was only prevented when the tax payers were forced to underwrite the fraud and cover the losses of figment asset valuations that allowed bank officers collectively to bank billions if not trillions in bonuses by utilising "mark to fantasy".

With rioting on the streets across Europe, both Obama and Brown fail to recognise that Mainland Europe is much more susceptible to revolution than the political systems of Britain and the United States. Therefore whilst the Anglo-Saxons do understand the outrage against the banking sector, however what they cannot understand is that the governments of France and Germany are reacting to the the real threat of political instability by implementing far more socialist policies not only for themselves, but to cripple what has come to be known as casino capitalism. This will shift the balance of power in favour of a less free market based global economy, i.e. more government control, regulation and central planning.

This will result in lower long-term economic growth and innovation, which is in line with their own populations demands, and therefore prevent capitalism from running amok in the future that forced their own conservative financial institutions to follow the same path towards bankruptcy. While the governments of France and Germany were labeled as Old Europe and were lectured on how their economic models were obsolete, New Europe (Eastern Europe) jumped headlong into the unregulated deep end of casino capitalism that always appeared to roll winning double sixes and is now firmly rolling losing snake eyes.

Has Elvis or Sarkozy left the Building?

President Sarkozy of France publicly threw his rattle out of the pram by warning that he will walk out of the G20 summit if he does not get his own way. This is a sign of frustration in that despite the Anglo-Saxon model of capitalism having failed, the U.S. and Britain are unlikely to move towards the Franco-German position of a super global regulator that threatens to end casino capitalism once and for all. The consequences of this will be much lower market volatility and long term economic growth as the western economies at least take a giant step towards a global socialist economic and regulatory model.

However the United States and Britain have illustrated by their actions rather than their words that they intend on preserving casino capitalism in more or less the form that led to the financial crisis in the first place. Since the United States still carries much of the clout as the world's financial and economic super power, coupled with its trustworthy air-craft carrier Britannia off the shores of Europe, then the U.S. and Britain are expected to get their way during the G20 meeting, despite the rhetoric from old Europe. The fact of the matter is that much of what will be discussed at the summit has already been agreed upon before hand for there was NO ROOM for FAILURE or significant disagreements, as the consequences of failure would be to wake up to another day of potential financial armageddon when markets would again panic in reaction to summit failure. Therefore, there will be much noise from the French and German leaders, but they will still sign on the dotted line.

Fiscal Stimulus, China Leads the Way

The prime objective of the G20 summit is towards co-ordinated fiscal stimulus across the global economies to stimulate economic demand along the lines of the United States, which has committed to spending 5% of GDP, Germany at 2%, Japan at 2.5%, and despite the Brown rhetoric Britain's fiscal boost lags at just 1.4%. Unfortunately, the problem with Britain and much of mainland Europe is the size of the welfare states that do not give much room for fiscal stimulus, because as unemployment rises so does government spending and hence the budget deficits widen. Therein lies the problem of huge budget deficits, which means prolonged economic pain for many years.

However all stimulus to date pales in significance against China's fiscal boost of 13% of GDP, which suggests investors should continue to eye China as the prime investment destination with the country most likely to continue to generate economic growth. My call as of September 2008 to buy China at SSE 2,000 has so far yielded 20%, which itself followed analysis and a call to sell China at SSE 6,000 in November 2007. China has continued to show relative strength against other markets and therefore confirming analysis of continued accumulation.

The western country with the most potential is Germany; however it is clear from Germany's actions that it is willing to endure economic contraction so as to preserve the export based economic model rather than attempting to inflate the German economy by means of local consumption. The key annoyance to the Americans and others on negative trade terms with Germany is that in effect Germany is seeking to ride on the back of the stimulus packages of other countries that induce their respective populations to in part consume German goods and services. This therefore boosts the German economy without the German government undertaking domestic spending. However, the problem with the German strategy is that it risks igniting protectionism.

Will it work?

The problem at the root of the crisis is I warned of a year ago is the off the balance sheet derivatives exposure that is many orders of magnitude greater than the stimulus packages of approx $3 trillion. We're talking about sums north of $600 trillions. Therefore, as warned in April 2008 when the Bank of England made the first loan of £50 billion to the bankrupt banks that it was a drop in the ocean, I just cannot see how even $3 trillion, or $5 trillion or even fiat currencies with more than $10 trillion can counter a $600 trillion imploding derivatives market. This to me, means very high inflation, as the only option the governments have is to spend money the governments do not have, and therefore increased debt, print money to spend and monetize government debt and finance bailouts.

Will it result in hyperinflation? Well, we don't need to be at Zimbabwe-style hyperinflation to see our savings wiped out by inflation. An annualised inflation rate north of 10% AFTER the current deflation will be bad enough to discourage savings and holding of fiat currencies, which supports my mega-trends outlook to take the current deflation as an opportunity to invest in commodities at bargain basement levels as well as prepare for much higher interest rates and hence lower bond prices.

Stealth Bull Market Quick Update

The stock market corrected inline with last week's analysis (24th March 2009) that called for a 33% retracement from the stealth bull market peak which was necessary in advance of the next spike higher.

Which implies that the correction IS IMMINENT. The decline should be just enough to convince of the mass of prevailing bearish commentaries that the retest of the low is actually going to happen, which therefore suggests a correction of as much as 33% of the RALLY (i.e. move from 6470), just enough, just enough to get the shorts in before the Stealth Bull market lets rip with the next powerful shock and awe rally.

However, it remains to be seen for how much longer I can remain in sync with the market to this degree, as the following the spike higher the markets by definition of the rule of alternating trends must target a much less probable and less easily recognisable price pattern than the relatively easy to deduce and trade pattern observed to date, which I will publish during the next week or so following an update to the gold road map / forecast trend of 21st Jan 09 (graph below).

Click to enlarge