MAXING OUT

With more gloomy data and markets in freefall, it is time to take stock and maybe put that credit card away.

I am a big fan of the Arthurian legends and have read various interpretations over the years. However, there is always that time when the proud King is going to be betrayed and he is going to go into his last battle and although you know that it is going to happen, there is nothing you, the reader, can do to stop it from happening.

The global economy appears like this at the moment. Like the slow-motion of a car crash, we can only look on in horror as the world approaches the buffers.

David Cameron made a telling point to the Canadian parliament this week when he pointed out that this is not an ordinary cyclical recession. Too right it’s not, mainly because we never really left the last one. Since 2008 we have been limping along, hoping that our numbers come up and we can head to the uplands.

Despite the self-congratulations of policy makers two years ago, we are back where we started where the money markets are beginning to shut themselves down to banks with heavy sovereign debt burdens, global growth is stagnating and even China seems to have reached its peak in terms of economic activity.

We are, in the words of the World Bank’s chief Robert Zoellick, in the danger zone.

But what are we going to do?

Cameron told the Canadian parliament that “it’s a debt crisis”. And debt is a problem.

In Canada, the politicians hit the debt problem during the boom times and so led to the state of the nation today where they have a more than ample war chest to offset the hazards that are on the horizon.

Essentially, Canada paid off its credit card and stuck it in a drawer and has vowed not to take it out unless absolutely necessary.

In Greece, the debate is whether to borrow even more money to service the credit card whilst being given a diet of broth and hard labour or to declare bankruptcy and start again with creditors impatiently waiting for it to earn enough money to begin to pay back its debt – if it pays it back at all.

Here in the UK we are in a half-way house where although we know that we should be paying back the debt but our family keeps demanding new shoes so we pay a little back, spend a little more and hope to inherit some money.

America? Well, America appears to be magicking up new credit cards whenever it hits its limit.

Let me make it clear to you – if you run up a credit card, max it to the hilt, do you keep spending and to hang with the repayments bill or do you cut back on your spending and try and clear the debt?

Many complain that we must spend our way out of recession but if we just keep driving up that credit card, eventually, like some European banks are finding out, the credit will stop and where will we be then?

Now, there is a risk that we will be forced into some speculative spending. But instead of some Roosevelt public spending plan, why not a tax cut? If we are going to have to use that credit card again to stimulate the economy, put that stimulus into the producers. Yes there is a risk that people will just hoard the bonus but that is what the banks did with the bailouts and at least the money will be with the private individual rather than a further expansion of the state.

On an aside, I quite liked the idea of instead of bailing out the banks, we should have just given each taxpayer £300,000 to put towards a house. Mad, but amusing and possibly effective at the same time.

At least for the moment, we in the UK are not getting more credit cards. Quantative easing (QE) is only effective in a short spell. The QE program that the Americans embarked on has had zero effect on its economic problems and may indeed have exacerbated them with doses of inflation and unemployment.

To me, the idea of QE being an effective way of managing your way out of debt is about as useful as giving a drunk a shot of whisky so they can make it to the next pub.

There is a further problem to contend with in our current situation. Uncertainty.

The markets are marking themselves to the situation at hand which is one of sheer uncertainty. We are unsure of what the eurozone is actually going to do next. With briefings and counter-briefings flying all over the place, the markets reflect this, hence the volatility.

Whichever decisions the eurozone makes, it will have to be clear and unambiguous. Whichever way they go, the markets will act in the appropriate manner but at the moment the markets are just unsure about whether Germany is going to take away Greece’s credit card or pay it off.

US DOLLAR WORRIES

AVENGING THE DEFICIT?

The UK this week sees the premier of Captain America: The First Avenger.

The good Captain was the original 9 pound weakling Steve Rogers, rejected by the army but given a second chance through the use of a super-serum that German scientist Abraham Erskine developed.

Erskine was killed just after Rogers' transformation by Gestapo agent Heinz Kruger. 

As the debt ceiling deadlock continues with politicians point-scoring and blaming each other as the deadline-day for default looms near, I wonder what would have happened back in 1940 with today's politicians?

Surely the Republicans would have appreciated getting someone out of 4F and into the US Army but would have baulked at the costs, complaining that this action can only happen if cuts were made elsewhere?

Meanwhile, the Democrats, although worried about the ever-increasing debt would have complained that the Republicans were playing petty-politics and that action was needed now to deal with the issue of a lack of super-soldiers. Any vote in favour of the Republicans would not deal with the threat in an instance but create problems six months down the line.

Of course, as events occured   in the story, the Democrats would have won but with the killing of the creator of the Super Serum, the Republicans would go into the next elections complaining that despite the Democrats spending all that money, the country was only left with one super-soldier so how could President Roosevelt justify the costs.

The Tea Party would have questioned how a German scientist got a job ahead of a good old American boy and how the lack of immigration controls and decent security checks allowed the assassin to get into the lab in the first place.


Editor's note: Erskine was originally called Reinstein, why it was changed, I don't know

INFLATING A RECOVERY

I've spoken about inflating your way out of debt before but I was a Charteris Treasury Porfolio Managers seminar yesterday and a few things stood out for me from its Chief Exec and Financial Risks Today contributor Ian Williams:

1) Globally we are in boom time. Ok, the barely breathing corpses of the UK, US and parts of Europe are not but essentially things are looking good elsewhere.

Of course there has been a transfer of wealth which began when factories starting shifting to China and India, but the big question for the UK and others is what do we do to keep up with the burgeoning economies of the BRICS?

2) The US is in trouble, serious trouble. Yeah I know, what's new? But, think about it, there is around $2bn (£1.22bn) floating out there because of QE1&2 and a possible third on the way. This in itself is feeding inflation through the commodities pricing but what happens if the US goes into recovery?

What does it do about the money? It can't easily take billions out of the economy without risking a recovery but at the same time, that unprecedented amount of money sloshing around the system will inevitably feed...yep inflation.

So is the States damned if it does, damned if it doesn't?

3) Oh, joy. According to Williams, we are yet to be at the top of the gold cycle.

We've still got someway to go - 2020 to be precise if the modelling is accurate.

MARKET JITTERS

So the US has joined Europe in sending out the smoke signals over the continuing concerns over PIGS in general and Greece in particular.

With rating downgrades for Greek and Italian debt and the hammering that Spain's ruling socialist party received in the local and regional elections, understandably people are worried.

The key will be what the Greek government decides to do later on today as debt owners wait and see
whether the promise not to "restructure" comes to fruition.

However, as is usual in politics, once something is denied three times then usually it will come true so we could be in for some interesting times ahead.