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Why we need to lie to ourselves about the state of the economy
Why we need to lie to ourselves about the state of the economy
Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world’s gross domestic product. Photo: Louie Douvis
Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation.
Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe.
Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.
Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.
The 2008 global financial crisis was a warning of the unstable nature of these arrangements. But there has been no meaningful change. Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world’s gross domestic product. In many countries, debt has reached unsustainable levels, and it is unclear how or when it is to be reduced without defaults that would wipe out large amounts of savings.
Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies.
The official policy is “extend and pretend”, whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road. The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles.
Read more: http://www.smh.com.au/comment/satyajit-das-column-20150825-gj7bcy.html#ixzz3kKkNLNv0
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An Insane Financial World
An Insane Financial World
We know that most western governments are deficit spending, borrowing heavily, in debt beyond the point of no return and must increase taxes and appropriations from their citizens.
We know that politicians will take the politically expedient path instead of addressing financial problems. We know they will “extend and pretend,” delay, and distract the populace.
We know that war has been a nearly constant distraction since 9-11 and that a crisis is often used as a justification for economic insanity, such as borrowing more to address an excessive debt problem. It seems likely that weakening economies, deflationary forces, excessive debt, massive unemployment, riots, economic anxiety, consumer price inflation, and so much more, will require more distractions. We should “rig for stormy weather” and expect another crisis and more wars.
Bankers, politicians and military contractors will benefit. IN OUR INSANE WORLD WE MIGHT ASK:
- What happens to our financial system and the price of gold when western central banks are no longer willing or able to ship gold to Asia in exchange for fiat currencies held by Russia and China?
- What would happen if the Chinese government announced that it will buy gold at $2,000 per ounce to boost their stockpile? When gold is no longer available at $2,000 per ounce, might they offer $4,000 or $6,000?
- What would happen if the central banks of the world admitted that Quantitative Easing is primarily beneficial for banks and the wealthy, and that QE has been a failure at stimulating western economies?
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The Catastrophic Costs of Extend-and-Pretend Are About to Crush Europe
The Catastrophic Costs of Extend-and-Pretend Are About to Crush Europe
Like a star which has expanded and now cannot maintain its grand state, Europe’s extend-and-pretend economy is now poised to experience a supernova implosion.
The costs of ill-conceived policies are always paid by someone–usually those with the least political power. In ill-conceived wars, the costs are paid by the soldiers on the ground and their families, and the civilians who suffer collateral damage.
The costs of ill-conceived financial policies end up being paid by taxpayers, savers, borrowers and those who lose their jobs in the inevitable bust. Those who conjured up the disastrous policies slink away to plush villas or defend their stubborn addiction to failed ideologies in the media (see Keynesian Cargo Cult and Paul Krugman).
The most ill-conceived financial policy of all is extend-and-pretend: extend-and-pretend means if a debtor is bankrupt, then extend him more loans to maintain the illusion of solvency.
Here’s how extend-and-pretend works in the real world:
— If a homebuyer has defaulted, give him new loans, or shift his loan off the books intozombie mortgage status.
— If a student defaults on student loans, shift the loans into forbearance, i.e. mask the default by putting the defaulted debt into zombie mode.
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