There is a common perception amongst bearish commentators, that we are in a debt de-leveraging phase and that the world economy will not recover, until the western economies have reduced their debt levels. I don't dispute this analysis, as one of the bearish commentators, but I don't think that it tells the whole story.
A large swath of opinion places the blame for the present crisis at the door of the banks of the world. Banker bashing is good copy. If asked to apportion blame for the state of the world, I would probably go for 25% responsibility on banks. Banks are just another form of business, but a business that takes risks with your money, without express permission to do so. Shareholders give the owners of the businesses that they invest in, permission to work with their money. When you place your deposit in a bank, you do not give permission for the bank to put your money at risk, but this is what they do on a daily basis. Unfortunately for all of us, the banks have invested very poorly and the result is that they are all having to be rescued by government. I would suggest that the 25% of the blame that banks should shoulder, is because not one of them has invested wisely or safely. The other 75% of the blame for the mess that we are in, is squarely on the shoulders of the politicians. We still don't have a sound banking system, anywhere in the western world. Mark to market accounting has been suspended and banks are still lending long, using short term finance, as it boosts their profits. This is not safe banking. Our politicians answer is to provide large doses of liquidity, increase capital requirements and introduce laws without any teeth. The latest J P Morgan fiasco is an indication of how far the banking industry has changed.
And so we come to the reason for this post. The banking industry is a good example of how deficient our politicians have become. If we had mark to market accounting, and banks were forced to match lending with borrowing, our banking systems would be safer. Unfortunately our politicians are not up to the task and the world continues on, in an unsustainable manner. I am a U.K. citizen and other than Japan, our debt problem is the worst in the world. Our politicians tell us that we are presently being austere and that we may need to reduce the pace of our austerity, as we are in recession. Our budgetary office is now the Office for Budgetary responsibility (OBR). Their projections show that we do not actually reduce total government expenditure, in any year, up until 2016. Why 2016, because that is as far as the figures go. So we are expanding out expenditure for every year for the next 4 years and calling this unbearable austerity. Apparently, we need to change course. In the U.S., Congress has not produced a budget at all and has certainly not started talking of austerity.
The debt story is therefore one of households de-leveraging, coupled with the start of government de-leveraging. Households have reduced their debt burdens, mainly due to their debt being written off. This de-leveraging process is estimated by Reinhart and Rogoff to last 7-8 years on average. We have now been reducing debt for 31/2 years, so are half way through. The second part of the debt story is now starting to unfold and it is government debt. The U.K. is only on limited austerity, because it fears the bond market reaction to any other policy. Once again our politicians are coming up short. In both the U.K. and the U.S. we are going to be forced into austerity. It is only the timing that is in dispute. Unfortunately, the government debt reduction is going to mean that politicians are going to be forced into withdrawing promises that they have made and reducing benefits that our less well off citizens rely on. In the U.K. means testing will become the rule rather than the exception. In the U.S. Medicare, Medicaid and welfare benefits are going to be reduced. Pensions promises are going to be broken everywhere. People are presently falling off the extended benefits programs in the U.S., so it is beginning (it is just not widely discussed). It has a long way to go. The debt story is entering its second and final phase and the results are not going to be pretty. Governments are starting the process of unwinding their promises.
The markets are falling hard at the moment, so I would expect some form of intervention soon, either from the ECB or the Fed (or both in combination). By soon, I would go for some time in the next 3 months, not necessarily in the next week. If it is sterilized Q.E., the market relief will be short. If it is full on monetization, the relief will be greater. The size of the package will designate the size of market relief. Relief is what it will be and it will be followed by another fall. I have written many times before, I am waiting for the central bank intervention that fails, for my short position to flourish.
Once we reach that point, austerity will be what is left. I have been doing voluntary work in the U.K. for 5 years, working 2 days a week at the Citizens advice bureau. I will face the consequences of our politician's shortcomings first hand. It will be sad to watch. Unfortunately that will not make it any less true. When we tot all of this up, it is our politicians that we need to get rid of, not our bankers. They are the real culprits.
I consider myself a bearish commentator, but this link goes to a post that has a tone that I rarely see, other than from people I consider cranks. I don't know quite what to make of it.
Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.