It is Obvious

Chris Rick has got altogether too much to say

Inside Job

Posted by chrisrick13 on August 4, 2011

It is obvious: you can do just about anything you want

I gave in and watched “Inside Job” yesterday.  It is a film about the 2008 crash in the US.  In summary I am amazed that not only are none of the architects of this crash in jail, most of them are still in post earning fortunes.  Particularly interesting are the cameos from LaGrande and Straus-Kahn given their recent activities.

I have refrained from comment on world economics and the media’s coverage of it over recent days.  There is just so much and I would be repeating myself.  This film has stirred me to return to the blog.  What stood out was the well documented consistent warnings of disaster handed out by many people that were studiously ignored by those with the power to do something about it.  Sitting here in 2011 it is obvious, with a huge dollop of hindsight that a disaster was not an ‘if’, but a ‘when’.

This brings me to today.  I notice that attention has moved away from Greece.  This is a country that cannot service its 340bn euros of debt that is now setting about running that debt up to over 500bn.  This is a country that needs remarkable growth to enable it to pay back its debts and has an economy predicted to shrink by at least 4% in each of the next few years, and, given the performance of that predictor in the past, probably needs that number doubling.  So the efforts of the European rulers and central bankers has been to create a problem twice the size of today’s problem in two year’s time.

The word I hear all the time is ‘growth’.  It seems that all modern economies (and economic theories) rely on growth.  As long as you have more money this year than last then you have money to repay debts and the confidence to take on more.  When growth stops then you have a problem.  You stop spending and your lifestyle becomes…ugly.  However your income is going down or staying the same as inflation continues apace.  Therefore you have to cut even more, borrow more, or spend savings.  For someone who been living within their means they start off by reducing the amount going into savings.  There is probably nothing in their budget to cut, so some long time later they start going into deficit and start to spend savings.  How much better for them to have had a long time to prepare.

So it is that most countries are cutting their spending so as not to borrow any more money and even trying to generate surplusses to pay back debts.  We can’t all do that at the same time!  Also they have to do it quickly as they have no reserves and are over-spending.

In a no-growth, or low-growth world there is no way to export out of trouble.  Reducing your wages to compete (a dollar a day) is just a race to the bottom when there already some fierce competitors sitting there.  Devaluing you currency is something everyone else is trying to do already unless you are in the Euro and cannot.

There is no easy, and more importantly, obvious way out.  Even if there were an obvious way I have little confidence our world leaders would choose it.

So what happens?  I don’t know.  The 1930’s is a good model.  1914 and 1939 might also prove good templates.  As an individual I could direct you to for the 31/7/2011 strip.  Failing that I return to an old theme of investing in yourself.  Perhaps a time has now come to learn some more basic skills as well those you currently have.  What I would also do is to provide a way of powering your electronic stuff for the duration of long power-cuts…but that is possibly too pessimistic.

You don’t need economics.  Just look at the scenarios and ask yourself the questions.  For example:  the UK has high and rising inflation, it has a deficit that despite government efforts is rising, it has a debt close to the point of a debt default spiral occuring, it has an economy with little growth that will optimistically dip in and out of recession for a long time.  What will happen over the coming years?  Cutting government spending certainly solves the money numbers, but it is inefficient.  You cut, say, 10% from spending and it shrinks the economy by 8%.  So to get to surplus from a deficit of 10% needs a 50% cut in spending.  Just lose the NHS and Social Welfare.  Need to triple the size of the police and the army though.

This is the situation in the middle of the country where a man in a fast car pulls up at a farm gate and asks the farmer leaning against it “What is the best way to London?” to which the farmer replies “Well I wouldn’t start from here.”

It is obvious: you can do just about anything you want – you just have to have the nerve.

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