Events in the financial markets are sometimes accompanied by similar events in the natural world almost as mood music-nature doing its worst to match man. The 1987 stock market crash was preceded by an extremely rare hurricane in the UK. I have been in New York for the past two weeks where I have had the experience of a rare earthquake and we are currently awaiting Hurricane Irene. I was interviewed this morning by Evan Davis on Radio 4’s Today programme about the tremors affecting the global economy and the ominous storm clouds that are closing in on the financial markets.
Credit Default Swaps (CDSs) on many banking institutions across the world, essentially the cost of insuring against the bank failing, are implying significant risks of default, similar to those after the collapse of Lehman Brothers in 2008. This is not without good reason. Banks across the world have significant and potentially fatal exposures to the sovereign debt of countries which are increasingly looking insolvent and in many cases have yet to come clean about the true depth of problems in their mortgage and real estate lending. Whereas in 2008 governments had the capacity to support the debts of these ailing institutions this is no longer the case. That particular solution or rather palliative is no longer workable as many governments are no longer seen as creditworthy and cannot borrow. There is no one else who can stump up the money needed.
As a result, the solution is unpalatable. As I have said many times before, the Western world has been living beyond its means for a very long time and as result the debts we are now faced with are insurmountable. In the intervening period until we work them down by the tried and trusted method of spending less and saving more, we will all be a lot poorer than we thought we were. The so-called Keynesian solutions are not working and will not work. Despite huge deficit spending to stimulate economies and support the banking system, Western economies are stalled and likely to remain so. Further deficit spending and stimuli will not change this-they will merely make the problem bigger. The problem being that we entered this depression a) with too much leverage and consequently the banking system went bust as precursor of the downturn; and b) with existing large deficits (the so-called Keynesians are asymmetric in their attempts to apply his theories-they only want to run ever growing deficits in the downturn-they forgot the bit about running a surplus in the boom so as to prevent excesses and provide ammunition when spending needed to be ramped up).
If you asked a man or woman in the street if the solution to being in too much debt was to borrow more I think they would regard you as mad. Because in these circumstances the rules for finding yourself in a hole apply-stop digging!
I will lend my full support to the first political leader of any persuasion or party who has the insight and courage to stand up and tell us the truth about the situation we are faced with.
You can listen to a clip of the interview here.