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 “The clock has finally struck twelve. I have been warning for over six months now that we are in a , no mincing of words - Depression”. Philip Copeman, TurboCASH Project leader looks forward.
Those of you that followed my Blog from July last year would have been forewarned that there was something deeply wrong with the world's banks and our financial system. Well we have gone though a few months ranging from denial to semantics to exuberance. Everyone from Astrologers to Psychologists are now economic forecasters. This is no wonder, it seems that as it is the economists that are the ones that most got it wrong.
How long will this Depression last?
The answer is simply : It will go on for as long as we continue to do nothing about it!
“Philip What are you talking about? We are seeing once in a life time, united efforts by the worlds leaders to stop this.” But that is just the point, stopping the Depression is not the actions we need. It is very unpopular politically to actually take the old real action that is needed. Our leaders, fearful of their coveted jobs, and playing their roles as the heroes of old, are doing everything upside down. I have studied copious amounts of business cycle theory, but none of it compares to the power of really good self serving, short sighted leadership.
We face a fundamental economic strucrual problem. Trade is about two parties exchanging goods. All the modern money instruments from letters of credit to single share derivatives are simply about sustaining trade between two parties. Trade is an exchange of goods and services, not about one party selling to another on credit and keeping on doing this without any end in sight. In broad terms that is what we have been doing. The Developing countries have been digging up raw materials, shipping them to the east, where they are manufactured and shipped to the West as final goods. The Eastern workers live off suppressed wages and artificially deflated currencies and the developing nations are paid deflated prices for their raw materials.
Only now are economists waking up to the fear of protectionism, see 'Buy American' cuts both ways Now isn't the time to wake up to this. Surely it is clear that this has already been happening for the last 20 years. The Eastern countries, China and Japan in particular have been buying Dollars and artificially inflating the value of the US currency, all in the name of protection the employment of their industries back home. The Americans (and most of the countries where TurboCASH is dominant), have been happy to go along with the good life have been willing partners to this games, while London has been its biggest broker. For the cost of the good life, the Western countries have allowed the Eastern countries to employ their citizens and mount a massive debt pile. In contrast to the relatively free market economies of the West, the centrally planned Eastern markets are fraught with anti competitive behavior. Chinese authorities won't even let their consumers freely browse the Internet, let alone buy goods. Similarly Japanese laws keep American rice farmers excluded from their markets.
There are very few alternatives availabel to us. The first is the one that we are currently following, namely where central authorities try prop up the debt ridden consumers and their failing corporations by creating more debt instruments to continue an ever higher deficit. Unfortunately, the world ran out of confidence in institutions doing this in 2008, it won't be long before they run out of confidence in the Governments doing this. We are already seeing cracks in the ranks of the supporters of more debt. This is ill gotten good intention is only likely to delay the day of reckoning - not avoid it.
The slow and painful way out of this is for the Western economies to become savers and to save their way out of this debt. This means long periods of Depression for the exporting nations. Once this savings cycle has run its course, consumers will have the confidence to spend out of income again. While consumers save, they don't spend and business gets really tight. This route will take a very long time. No kidding – it took 15 years to get in – it will be a similar amount to get out!
The fast, but equally painful, way out of this is to accelerate the day of reckoning, raise interest rates, collapse the Western currencies and praise the producers and small business that will create the new economy. This means letting the inefficient corporations that have lived of selling to artificial customers fail. It means letting those parties that have accumulated piles of no hope debt (both debtors and creditors) sort out these balances in a series of rapid and painful liquidations. What will be left is a new set of bruised economic agents, but ones not burdened with the debt that will hamper us for years to come. This will also means that the Eastern countries will pay their share of artificially created wealth. It will also send a clear message to China and Japan that unless they can quickly develop an appetite for American Pornography and Software and British Tea and Sandwiches, they have no business selling their goods in western markets.Similarly if they dont; rapidly develope a liking for African BEadwork and gambling at Sun City, they can forget about us bying their cheap plastic goods.
If tax payers are going to support any industries – it should be new industries that are capable of reversing the current trade account imbalance. Instead of propping up old financial institutions, give seed capital to a new generation of banks that will lend money to debt free small businesses that have nothing more that a good idea and a twenty five year old entrepreneur that does not know the meaning of failure..
The liquidation solutions is also the quickest way for correct the market for commodities that will give the developing worlds a fair chance to grow economically. Under the regime of the recent past, developing countries have been subjugated to selling to a single buyer, who artificially drives the prices of commodities down.
If you can see a world where by Barrack Obama takes the route from being the most popular President in recent history to being the most reviled President and Gordon Brown Falls on his Fabian Sword, then you can see the fastest way out of here for us. All other alternatives point to a long road forward.
So there you have it. Our destiny is not predetermined by the vagaries of the business cycle. It is in our own hands. What we require now is strong leaders who are prepared to stand up and make unpopular decisions, decisions that will lose them votes, make us hate them, but save the future of our children.
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