Tuesday 29 June 2010

Life after Debt? Part1.

News comes out today from RBS about the real nature of debt problems facing Europe's banks. The FTSE is falling on the back of this as I write, off 2% and below 5000. I did not expect such a big re-tracement this year from the high's of 5800's. Still, I remain somewhat bullish for the rest of the year after this dip is played out; I maintain UK QE will return if the economic figures get poorer.

What is of more concern is that:

a) it is quite surreal for RBS to be pushing this when UK banks are acting in pure schadenfreude mode because they have already gone bust.

b) Having said that, European banks do have a lot of debt that they can't shift. This means no new lending and reduced profitability/increasing losses.

Europe is turning Japanese. The real story in Japan is that quantitative easing has not fixed their economy, it has not generated the inflation needed to wipe out wealth and debt. All Japan has had is 20 years of recession. There has been no life after debt.

Europe is heading the same way. For there to be life after debt we need catharsis, that means banks going under, crazy loans being defaulted upon and not put into 'extend and pretend.' That way is the the Japanese experience.

At least in the UK we have a Government determined to create a life after debt, more austere perhaps, but a life at least.


Marco said...

The UK, and Europe, have gone down the Japanese route.

Zombie banks stalk the landscape, unwilling to disclose their balance sheets in full and addicted to quirky central bank funding schemes, swapping toxic collateral for liquidity.

The authorities are complicit here, trying to prop up the banks and rushing to rescue at the merest wobble.

sobers said...

It does occur to me that the Japanese experience is possibly the best scenario we can hope for. IE the world does not end in a Depressionary slump, with riots, jobless hordes roaming the streets, mad max style. Which is entirely possible if we entered a downward spiral of mass bankruptcy, much lower asset prices, more unemployment, more bankruptcy etc etc.

Instead QE and government debt keeps everything on a even keel. No rise in the level of national wealth, everyone just bumping along, keeping body and soul together (just).

Of course you have to remember also that Japan is in trouble too - its debt burden is unsustainable long term.At some point they will go the way of Greece. Its just a matter of time when the markets call time.

But if you offer our politicians the choice of 20 years of no growth but generally stable national life, vs massive social upheaval as all the debt is liquidated in short order, I reckon they'll choose the former every time. And the electorate might too, if they were ever asked.

Andrew B said...

So, based on this analysis, what should one do :
- Avoid Europe
- Neutral on UK
- Positive on ...


Anonymous said...

positive on gold!?!

Steven_L said...

"...riots, jobless hordes roaming the streets, mad max style."

It could probably be quite good fun as long as you still had Sky News and an internet connection.

These days, I reckon the jobless hoardes would be more likely to stay at home (or squat with their parents) and play on the XBox.

Nick Drew said...

I like jobless hoardes, Steven - great freudian slip !!

I predicted fighting in the streets in a little interview 2 years ago ...

CityUnslicker said...

Andrew B -

Is there a 3rd way. I think this is it, we allow some banks to go under (like we should have let Northern Rock sink), we limit the pain with mild QE to stop market collapses. But we do reform, we don't allow moral hazard to pervert the system a la Japan.

A middle path between greek suicide deflation and Japanese euthanasia.

Old BE said...

What we haven't yet heard too much about is over-regulation and over-legislation. If Cam and Cle can start burning those controls we can have a decent period of catch-up growth even if the tax burden doesn't fall.

I don't think the cuts or the debts will be as bad as some think. A modest squeeze to get the state's share of GDP down a bit, a bit of growth and things will look a lot better.

Jonathan said...

The politicos can spout about growth as much as they like but ultimately growth comes down to working harder.

As long as we are comfortable due to all the middle class benefits and our wealth is protected by bank bailouts, QE and low interest rates, there will be no incentive to work and things will just drag along.

Electro-Kevin said...

I learned much about the Japanese psyche in my study of karate. They have a special word - the word is 'mu'. There is no word like it in our language.

I can't give you a direct translation but if we were to answer a question such as:

"Is the cat dead or is it alive ?" We could give two answers about its state:

- Yes
- No

The Japanese could give three answers as to whether the cat is dead or alive:

- yes
- mu

'Mu' meaning that the cat is neither dead and nor is it alive.

Such conceptual neutrality is normal in the Japanese mind.

Their economy is mu.

I left karate because I began to develop Tourettes.

mark said...

I simply can't see the UK going Japanese. When the bubble burst Japan was able to fund its fiscal deficit for 20 years from domestic savings. Japan is also an export economy producing value added goods that the rest of the world wants.

There is no way the UK can fund deficits of 150+ billion GBP from domestic savings. The UK will need to rely on foreigners in a world where trillions in sovereign debt needs to be funded or have the Bank of England continue to purchase.

This is a situation which is highly unstable and can't continue. Somethings gotta give in a bad way - interest rates or the pound or inflation or default.

Steven_L said...

The thing you're missing CU is that the tories want more off-balance sheet government borrowing.

not an economist said...

"At least in the UK we have a Government determined to create a life after debt, more austere perhaps, but a life at least."

I don't share your confidence about the government's austerity agenda. It sounds good but, push come to shove, I don't actually believe Nick'n'Dave will follow thru. 25% cuts in public sector spending is very high. I don't see how any govt could survive that, esp when the govt is reliant on the support of a party many of whose parliamentary members don't really share a pro-free market agenda. Heck I don't even think Tory Councillors across England will necessarily share the govt's cuts and policy agenda once they wake up and realise what the implications of it are for their own little fiefdoms.

Ultimately more and more reliance will be put in raising taxes and QE and less on cuts. This will serve merely to keep this country in a long drawn out recession with increased intervention of other kinds that we have not seen for decades (e.g., exchange controls, wage and price controls, increased direct govt investment in industry aka the failed policy of picking winners). Some compare Cameron to Tahtcher. To my mind the better comparison is Ted heath - a Prime Minister who came to power with much promise but who within two to three years had done a major about face on economic policy to the despair of his back benchers.

James Higham said...

After debt?