Yesterday saw the biggest losses on world stock markets since the crash. The truths are slowly dawning that too much has been borrowed to be repaid, you cannot spend your way out of trouble, Europe has a currency but no coherent policy to manage or secure it, America is in cuckoo land arguing about the ideology of what their country stands for, who governs it, with what objective and who pays, yet without having any meaningful debt reduction plan even in sight.
Make no mistake, this is the start of something big. No longer will statements of intent be able to be consummated by inaction, nor will token plans of a bit of a cut here or there be of any use. Italy is said to be next, with Spain, itself without an effective government ahead of deferred elections in November, right behind. There is not enough money in the Euro funds to bail these countries out and to provide them, they will have to go as supplicants to Germany, which, having taken a big hit bailing out its erstwhile communist eastern half, will likely say no. Except on German terms.
It will be interesting to see what those are. Meanwhile economic growth everywhere has slowed for the very good reason that the previous growth enjoyed for so long on borrowed money, was an illusion of hyper-inflating assets. Growth cannot return until borrowing is reduced and borrowing cannot reduce until growth returns. That is the core of this mess.
Two solutions present themselves. Neither is ideal. The Weimar/Zimbabwe model of printing money. This does not enjoy a good reputation. The other is a general default all round and a fresh start. Either way you do not want to hold shares in a bank. The seeds of disaster sown with such greedy abandon for so long, are beginning, now, to grow.
In the end nothing will work until the Euro is either abandoned because member countries are unwilling to surrender economic sovereignty to a central financial authority, or such an authority is put into place and is working. In America this nonsense over staged cuts and inadequate taxes has got to end with a consensus about what is required of a federal government and an acceptance that the tax base has to be big enough to pay for it.
Whether this is the minimalist model of the old Confederacy, now championed by the Republicans, or whether it is Lincoln’s European style model now championed by the Democrats, has to be resolved decisively, one way or the other. On Capitol Hill a message needs to sink in. The pantomime of their stand off last week impressed nobody. The world no longer hangs on smooth words. It hangs on numbers which do not fudge or spin. When you get to numbers, the U.S. national debt has so many noughts, it is beyond most people’s arithmetic understanding. So far there is no convincing plan to stop more noughts being added and no plan at all to start paying them off.
At the moment the UK and Germany alone appear to have financial policies which recognise the fix the world, especially the West, is in. Whether either or both can hunker down whilst the storm breaks around them, remains to be seen.