As long as it is tied together by globalism, the world economic system will continue to be a series of interlocking vicious circles

It was fascinating last week to watch various news agencies from Bloomberg to CNN rationalising share falls around the world with the use of generalised phrases like ‘foreign debt anxieties’ and ‘sovereign default fears’. The simple fact is that the Bank of England announced (pretty much) an end to QE, as a result of which shares fell in that debtor country, depressed another Anglo-Saxon country with a similar problem – and then terrified all the creditor nations in the East.
While all this tends to support what financiers around the world have been telling me is their view for the last six months – “The UK is a basket case” – the truly worrying thing is that the process started with a small leak, and continued with an attempt to stem the leak – after which a dam-full of watery bowels broke all over the place.

The week before, sources close to Fitch and S&P began (perhaps deliberately, who knows?)flagging up their feeling that Darling, Brown, Cameron and Tom Cobbleigh were sending mixed, confused and even opposite signals about spending cuts. As for the UK’s debt management ‘strategy’, there was more than a whiff of deckchair-rearrangement to it.
Enter Mervyn King and a somewhat artless attempt to herald economic success (and calm debtor fears) by cancelling QE. Exit millions of equity investors around the globe.
This was good for The Slog’s site hits, as we led the field on reporting the domino effect. But to be frank, I’d rather have had a quiet day. Time now, however, to examine what the blindingly obvious problem of Bourse-supported, global remote-investor, credit-driven capitalism is: wherever you are and whatever the issue, what’s good for Peter is a jump-from-the-ledge nightmare for Paul.

The credit-raters obviously don’t want any defaults, and neither does the IMF. Lenders do, however, like credit downgrades, because they allow them to charge more for the loans. They just don’t like too much public spending, because that suggests the client is still shopping at Fortnum & Mason…and doesn’t give a drat about honouring the loan repayments.
Debtor nations with this image problem are therefore tempted to cut government support for the economy as a quick-fix way to calm nerves. The stockmarkets hate that, because they know it makes the future less Rosy, and risks recession. But Treasuries like it because they help their situation, and take money out of gold…thus bolstering the currency.
Exporters then get edgy, because it makes their products more expensive abroad. But in theory they like low interest rates, because that means they can borrow to expand to export more. When banks are broke (for example, right now)zero rates are a nightmare because their business is attracting investors with good rates (80% by volume) so they can lend on at a profit (20%).
Governments that are going broke don’t even want to think about banks going broke, because if they can’t borrow money from banks, they’ll have to borrow it expensively with gilt (bond) issues. And if every country is pushing to borrow money via such private investors, well then hell, there just ain’t gonna be enough to go round. So governments spend every last cent of the People’s money propping up the banks. But that’s bad for the economy, because people feel poorer…and hopeless for the banks, because people pay off the debt in droves.
Eventually, the government taxes the People more (slowing economic growth further) and prints money to stimulate the economy (inflating the currency). They like doing this because it deflates their overseas debt, but the creditor nations hate that idea because that reduces their loan income. They also hate the low interest rates in those countries, because that too spreads round the world….and leaves their own people with nothing to invest in but assets – like buildings. Asset bubbles are messy when they burst,and so pretty soon the creditors start making threatening noises about economic sanctions if the poor folks don’t raise their rates and cut QE.
And there you go – we’re right back at the start again. Anyone want another ride?

The experts (by this I mean market psychologists,not economists and bankers) are gradually beginning to make themselves heard above the unwise shouting of crowds. And what they’re saying is so easy to grasp a bright kid of ten could grasp it: that in global, free-market capitalism, there is a never-ending chain of goose and gander. You can’t please even half the people half the time – and at the end of the road, you can’t please anyone.

For a long time now, I’ve thought ‘Wouldn’t it be better if countries and communities could please themselves?’ My beef is not with capitalism; it’s with the dominant money-raising and expansion mechanisms employed to keep the global capitalism on the road. I think that instead, we need alternatives, firewalls and safeguards to ensure that the train stays on the rails.

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