Broad Oak: your emotional support animal

Monday, May 17, 2010

Debt, inflation and the looming currency crisis

This post has been copied from the Broad Oak Blog (see also sidebar on right). I think I'm getting to the point where it's all been said and like Wolfie, maybe I should stop and take care of my own situation as best I can. I shall continue to post from time to time on the Broad Oak Blog, focussing on financial matters for the benefit of clients. Otherwise, I shall read others' blogs and websites - but try to keep quiet, apart from the odd comment.
_____________________________________________


The above is a recently-released video from the National Inflation Association in the USA (hat-tip: Tim Iacono). In short, it says that the budget cannot be balanced and the currency will eventually collapse. According to the NIA, perhaps a few wealthy investors will prosper from speculation in gold, silver, agricultural land, but the vast majority of Americans will suffer and the middle class will see their savings wiped out by inflation.

This is not a problem restricted to America. According to page 2 of this study by Citibank, the UK will not bring its government debt under control until 2013/2014, and even that is on assumptions that the author sees as optimistic. The second graph shows that compared to the debt-saddled "PIIGS" group of Western European countries, we will take longer than all of them just to be in a position to begin to reverse direction.

Further, the UK is by far the worst of the G7 countries in terms of the debt owed to foreigners, according to this article by Fraser Nelson of the Spectator magazine (and that was back in December 2008). So our economy is at risk from a reassessment of its creditworthiness by foreign lenders and we are vulnerable to a hike in interest rates - which in turn would make it far harder for us to service our debts. True, foreigners have recently shown themselves willing to continue lending to us, but that is against a background of concern about Greece. The picture could change in the intermediate future.

Finding out the true state of affairs with debt is difficult - it seems to be an embarrassing secret. We are given a confusing array of definitions and much of the discussion we hear on TV and radio is about government debt, rather than the total burden of debt within the economy. Even then, we hear talk of "reducing the deficit", which actually means continuing to get into debt, but not quite so fast - the actual total amount outstanding will increase for years to come.

If you want to get some notion of the overall liability, see the graphic on this post at Naked Capitalism: it shows that all in all, we are not much better off than Greece - and Germany is scarcely better off than the UK. The US is a giant debtor - this graph shows the position at the end of September last year: debt was c. 370% of GDP, or half as much again as Ireland's, relative to national income. To put it another way, the US now has 42% more debt-to-GDP than before the Wall Street Crash in 1929.

Even on this definition of debt, experts disagree about the extent of it. Another source (stockbrokers Charles Schwab) agrees on the US figure, and then says:

"But on this metric, we're in "good" company: The United Kingdom's total debt-to-GDP is a whopping 470%, Japan's is 460%, Spain's and South Korea's are 340%, Switzerland's is 315%, France's and Italy's are about 300%, Germany's is 275% and Canada's is 245%. These are all records.

"The "BRIC" countries (Brazil, Russia, India and China) all have total debt-to-GDP under 160%. However, since this study ended in 2008, we have to add in China's stimulus package, which was three times the size of the US package, not to mention China's banks lending out $1.3 trillion during 2009. Some believe China could now be more leveraged than the United States." (My emphasis.)

Pictorially, Schwab's figures would look like this:


Because of the crisis facing so many nations including the world's wealthiest, there is heavy pressure on their governments to keep interest rates low (or lower than inflation), while they try to shore up their public finances. This means that savers will see the value of their money reduce, even when interest is added to their accounts and not spent. When I worked at an insurance company in the late 80s, we had a sales aid that showed the real (adjusted for inflation) value of cash deposited with the Halifax Building Society for 10 years (from 1974 to 1984, if memory serves). Even with accumulated interest, the sum at the end would only buy half as much as when the cash was first deposited!

Much the same story can be seen with the stockmarket. In December 2008, I made the following graph reinterpreting the Dow Jones Index in the light of inflation:

In "real terms" (and yes, one can argue long about what is an appropriate measure of inflation) the apparent recovery in equities was actually a fall in value from 1974 to 1982 - a loss of about two-thirds in eight years. The picture for the FTSE is something similar (though not as severe as in the USA, which was paying for the Vietnam War on top of other problems): apparent gains, undermined by the fall in the purchasing power of money.

The difference between cash and equities is that the latter did eventually bounce back and turn a "real" profit, thanks (in my view) to very significant inflation in the money supply, not under a Labour government (though they did their fair share both before 1979 and after 1997), but under the Conservatives! I've written to people including Lord Tebbit and the economics editor of the Guardian, pointing out the long-running use of monetary inflation to make the economy seem healthy (while weakening it), but perhaps unsurprisingly, have had no response. However, if recent comment (see link just given) on the dimishing returns of monetary inflation are correct, we now approaching the point where further stimulus will actually reduce gross domestic product (GDP) - pumping more money in will be worse than useless.

The fact is, while some compare our situation to that of the Thirties and others look back at the Seventies, the debt problem is now far greater than in either period. The past is not necessarily going to be a good guide to the future. Respected commentators like Dr Marc Faber are coolly convinced that our currency system will simply break down; in which case the social consequences will be very unpleasant.

The challenge now is for you not to make a profit, but to find some way of hanging on to whatever wealth you have managed to accumulate. I cannot advise you personally here on this blog, but do please contact me if you are a client and would like a review.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

15 comments:

lilith said...

Thanks for this post Sackerson

Paddington said...

There I was, having a cheerful day .....

James Higham said...

Manufacturing led recovery - who are they kidding? 58 points? Just look at this site:

http://jobseekers.direct.gov.uk/

... and see how many manufacturing jobs, factory jobs, are on offer in any given small area.

Then add that to the stats quoted in this article. Then we look at the hidden debt.

Paddington said...

On the hate list are the Departments of Energy and Education, always on the hit list for the right wing. The former was neutered under Reagan, just as they were doing the research on shale oil that would have made the US energy-independent.

I am suspicious of this group, although I agree with many of the comments in the video.

Sackerson said...

Lilith, nice to hear from you, will you be developing this theme?

James - and the decline of manufacturing has, of course, proceeded under both blue and red administrations.

Yes, Padders, the video makers have a song of their own to sing. As for spoiling a cheerful day, those who read me regularly will not be surprised by this post. We will, of course, get a rebalancing, but the sooner we clearly understand the price and pay it, the less painful and costly it will be.

James Higham said...

No disputing that, Sackers. Thatcher led us into the services area.

Nick Drew said...

Adios, Sackers, old bear

Sackerson said...

Hi Nick and thanks - have a look at the Broad Oak Blog instead!

Trenton Ulysses Rock said...

What does the NIA say about the latest CPI reports?
NIA plays on The Culture of Fear..IMHO
Is there a National Disinflation Association?

hatfield girl said...

You're right, as ever; it's what we do not what we say that matters now. 'Bye, S, all the very best.

韋于倫成 said...

Look before you leap...................................................

LashonJ_Greenblatt said...

成人影貼 彩虹視訊聊天室 聊天影音 85cc歐美 免費影片欣賞 同志交友 女優寫真貼圖 色情性感遊戲 影片h 偷拍熟女露點照 視訊美女聊天室 可愛 情趣網 微風18 少女圖片 成人影城 免費線上觀賞a片 情色貼貼 免費線上看色情片 徵一夜情人 av383影音 完美女人幫 寫真 色美女貼圖 辣妹爆乳 人妻-免費線上 熟女 a片下載 空姐影片 a片a圖a漫 巨乳女寫真 85cc論壇 微風人成 aa片試看 777成人 人之初貼圖 援交留言 嘟嘟情色網 鋼管秀奶 av片線上看 洪爺影片欣賞 國中大奶正妹 sex情色貼片 線上下載av 巨乳人妻 夫妻性愛貼圖 後宮無碼a片 限制級小說 0204成人 國中生性愛 美女走光

瓊慧 said...

真正的朋友不會把友誼掛在嘴巴上 ............................................................

彥安彥安 said...

思想與理論,貴呼先於行動,但行動較思想或理論更高貴........................................

Wolfie said...

I think its important to note that pretty much every major economy is now mired in substantial debt with the only countries escaping being resource-rich (non-globalised) but vulnerable to global down-turn. This equality is important factor in understanding what will happen next because if everyone tries to inflate away their debt (monetary expansion) and devalue their currency there will be little relativistic change overall. What is drastically different to past crisis periods is the global labour market; which is now in effect limitless. This gives politicians almost no room for manoeuvring as deflationary forces will swell at every attempt to inflate. Painted into a corner is an understatement.