ECONOMIC CRISIS: Old dogs require new tricks. Best prices paid

As globalism heads for a great fall, all of King’s horses and Geithner’s men know not how to put it together again

You may recall that earlier on in the rifle-firing disaster spreading uncontrollably Arab spring, The Slog wondered if the bizarrely hasty decision by Libyan rebels to set up a bank for their money was to do with laundering Al Q’eida funds. I’m now more of a mind to think that, having seen the madman Gadaffi ripped off by investment bankers, the Benghazi rebels decided that this time they’d have their own outfit, and use it to rip others off.

One $1.2 billion fund bought into by Gadaffi’s advisors when they were masters of the Universe lost 98.5% in just eighteen months. And yes, it was the usual list of suspects – SocGen, JPMorgan, Credit Suisse and BNP Paribas – selling this salami-derivative crap. But smart and covered in snake-oil as they might be, time is running out for those who think we should just mind our own business as they set about God’s work of destroying forty years of economic endeavour.

As the working week draws to a close, we have reached another of those of those staging posts on the way to the sewers. More exactly, what each of these posts represents is another point on the bumpy fall from the mountain top: like ‘anti-camps’, they measure our progress in the same way as climbers of Everest measure theirs. Except, of course, that the downward trip is much faster – and infinitely more likely to have the sound of ‘splat’ at the end of it.

This latest point might even be the anti Base Camp – I’m not sure, and nobody can be for now: we won’t be sure until rear-mirror economists start writing about its inevitability a few years from now. But it is full of foreboding. From China via the EU to Britain, the US and eventually Australia, it’s as if the bad news has come to a confluence, beyond which there are only rapids leading to a financial Victoria Falls.

What most folks didn’t take out of the Libyan regime suing for peace, for instance, is just how much Italian banks are exposed to the collapse of Muhammar Gadaffi. And how that news comes hot on the heels of a eurobank set in turn desperate for Italian finances not to turn sour. What they might also not have grasped is just how much of a disaster it would be for Christine Lagarde to take over as boss of the IMF. Not only does she represent blind obedience to My Euro Right or Wrong, she is the dilatory arrogance of Brussels made flesh. Worse still, she has the backing of Die Fuhrerine Merkel – a woman of great determination, whose direction is unfortunately impossible for anyone else to determine.

In the UK, while David Cameron slithered all over a bloke even more indebted and helpless than he is, it became clear that the combo of uncontrolled public sector spending and poor economic output means the UK Coalition has failed in its main raison d’etre; and so Britain is thus doomed to some form of default in the future. The OECD confirmed the hopelessness, but as very few people care what the OECD thinks these days, its damning report passed most commentators by.

The news was equally black for Cameron’s guest President Obama, a man confirming a ‘special’ relationship he doesn’t believe in by calling it ‘essential’. The Slog took this to mean ‘the bare essentials’ as in ‘carry on as before’. Parliament lapped it up, but Mr Soundbite will be infinitely more concerned about the latest US Bureau of Economic Data output, which showed that the experts had been surprised again, and thus the growth numbers were weaker than it had previously thought. As the FT put it, ‘The US economy has flattered to deceive for the past couple of years, never sustaining any run of stronger growth, but never falling back towards recession either’. That’s a fair summary, although it fails to mention that without more or less constant QE/POMO, it would have fallen into a deep depression. Such recovery as there has been was achieved at the expense of the taxpayer, and the credibility of the Dollar. It is a confection, and every open-minded economically literate person knows this.

But in the light of all that, the S&P 500 was largely unchanged. It won’t change, of course, until Bernanke confirms the end of POMO later next month. In the meantime, Hell, the Russians are only in the suburbs and the 12th Army might yet relieve us – more Champagne, Herr Oberst!

Back in Europe, even the mood for Champagne as a sedative-cum-analgaesic* was absent. Greece, Ireland and Portugal being only a spin media briefing away from total collapse, the credit agencies pointed out the obvious: that Spain and Italy’s ‘immunity’ to debt contagion was the usual Brussels bollocks. And so Asia aka China felt the need once more to raise the mood. An EU report heavily quoting Klaus Regling, head of the European financial stability facility, announced that Asian investors were expected to represent a ‘strong proportion’ of those buying Portuguese bailout bonds when the eurozone begins auctioning them in June. The euro immediately made up ground, as the markets failed to spot that this was a case of the Hindenburg airlifting passengers off the Titanic.

The Chinese Hindenburg looks increasingly likely to go down in flames. At least, that’s what I think – others must take their own chances. My perspective runs like this: Beijing has run out of standard procedures: its central bank has already used up most of the available  ammunition for fighting inflation. What Beijing can’t do is stop slavering foreign money pouring in on both the current and capital accounts. People’s Bank of China interventions in the forex markets to keep the yuan’s value stable simply turn almost immediately into money supply. Forget the quoted numbers: real interest rates remain negative. So for all its alleged tightening, monetary policy remains loose. Once again this is a classic example of how the Politburo favours past knowledge gained over the need to deal with newly globalised money.(See Slog posting from the past)

Some day in 2012, lack of demand from the US, UK and eurozone is going to result in China rapidly building stocks of crap it can’t sell. At this point, it will stop ordering raw materials from Australia.

The rosy economic outlook and forecast from the Australian Government and its Reserve Bank are based on hopes that the Australian economy will continue to enjoy an environment where house prices keep rising, incomes keep rising, inflation remains under control, the economy is able to keep creating jobs in order to keep unemployment low, Government spending is kept in check, and the Chinese economy grows strongly ad infinitum.

My visit to Australia and discussions with the locals led me to the conclusion that all of Prime Minister Gillard and Treasurer Swan’s assumptions are complete hokum. Australia has the widest gap between average income and house prices of any developed economy. The Socialist Government is spending too much, immigrant birthrates are far too high…and the country’s only real customer of any value is China. China is heading for a hard landing on its a*se – and when it does, the Aussies will have an even harder one on their heads.

None of this is science of any kind – rocket or otherwise. It is merely the logical end result of an ill-thought-through belief that globalism is Tomorrowland, wherein all economies will – by some miracle – be equally balanced in their desire to sell wine and import solar garden lights. The path to disaster could read like this –

US >>UK>>eurozone>>ClubMeds>>China>>Australia

– or it could equally credibly go –


– although my own personal favourite as of today is –


Here’s why my current thinking starts with the euro and the UK:

The current tidal wave of negative Euro news includes fears that Spain’s election result will expose further creative debt accounting there, credit warnings on Italy and Belgium, and the ECB’s Weidmann telling us the Eurosystem would be destabilized “by any further re-profiling”. Hmm. There will be further profiling, and therefore there must be disaster. On Tuesday, Moodys hinted at potential downgrades ahead for 14 out of 18 UK banks. Lloyds, RBS, and Barclays are all on the list. In anticipation of this, I sold my RBS gold-tracker note twelve days ago. I got a good price and a 120% profit, but didn’t wait for the upside multiple to kick in: why be greedy when you could easily wind up with nothing? Other sources – too many for comfort – affirm my view: there is increasing reticence from investors about holding UK bank paper.

Once people no longer trust banks, all bets are off. Once people no longer trust banks owned by the Government, all things are possible – and Sod’s Law applies: if it can happen, it will.

*Analgaesic: large horse-pill taken up the backside by investors expecting early insertion of yardbrush