How do you cut salaries, jobs and pensions and raise income tax, corporate tax and VAT, and still get growth? That is the pair of pliers our governments have chosen to construct around their own gonads.
How is Portugal or Spain, let alone Greece, going to earn the cash to paying its debts if the cuts it makes to government spending cause unemployment to go up, discretionary spending to go down and investment by business to stop? Of course the answer is they won’t. Which is why all governments are either ‘revising’ their growth estimates downward or adamantly denying they need to. Which is a sure sign their revision will be worse than those who are coming clean and admitting to it now.
The problem is not a new or unforeseen one. But our past actions have made it much more intractable. Governments have been funding ‘stimulus’ packages for so long, they long since stopped being stimulus and have simply replaced, that which they were supposed to stimulate. In America, Fannie and Freddie didn’t help the mortgage industry, the became it. In China, while government spending flooded the economy the Shanghai index doubled. As the ‘stimulus’ liquidity dried up the Index has decreased by nearly a quarter.
In Portugal, as austerity measures have begun to be implemented unemployment has jumped by 0.5% last quarter to 10.6% and latest estimates are that earnings at BBVA bank for instance will not now pick up until 2013!
This is what happens when stimulus has failed and instead replaces what it was supposed to stimulate. That is what has happened during this crisis. Only there is not a government anywhere that cares to admit it. If their policy had worked then we would be ‘withdrawing’ the stimulus.
It is the difference between shocking a heart back to life versus putting a dead patient on a permanent heart and lung machine. We are the latter.
If we borrow more to do yet more bailing and stimulating, the bond market will convulsively stop working. If we don’t grow then our debts will overwhelm us more slowly but more catastrophically in the end, as the compound interest grows during the time of our slow melt down.
The only other solution is to print. QE allows us to continue with the present policy without the bond market seizing up immediately. Death comes more slowly. For a while we print new money and spend it like old money. Simply because it takes time for devaluation to work its way from hand to mouth to brain. But it will get there. And when it does, not only will the bond market seize up, so will the stock market and the currency in your pocket as well. A much worse outcome. But the one we are walking slowly towards simply because it is slower.
The ECB knows this and that is why they were so quick to insist that their bail-out was not QE. It was NOT QE, they said, because the new money they were going to use to buy all the crapulous Greek debt from the French and German banks who were sitting on it, was going to be balanced by the same amounts being withdrawn ‘elsewhere’. Where elsewhere was , was left vague.
Today we were told the ECB would withdraw money via Term Deposits. These are simple fixed term deposits which means a deposit account you cannot withdraw from, for the agreed term. Sounds fine. But now we are told these fixed term deposits WILL be eligible for pledging as collateral for a loan of euros, at ECB Repo auctions. This makes no sense. If true it makes a mockery. Because it would mean this supposedly withdrawn cash would be able to be reconverted back into cash at the ECB. A barmy round and round.
No doubt there will be rules in place and learned criteria to be met, but in the end it is clear that all the banks will need to do is cry, ‘the sky is falling in’ again, as they did to get TARP passed, and as they did a second time when they wanted to get the ECB bail out passed. They have leant that our politicians will always cave in and sell us out. Why won’t the banks do it again?
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