Our Economic Demise: Debt Crisis 101 An e-book by Tony Westfallen [email protected].
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Transcript of Our Economic Demise: Debt Crisis 101 An e-book by Tony Westfallen [email protected].
Quick introduction• I have written this short eBook , because there is a lot of focus, debate, and media comment on
the current economic crisis, including “finger pointing” and blame being applied, sometimes unfairly, on certain groups and individuals.
• I am not going to excuse anyone from their role in creating the current crisis, but I do believe we should look at all events and accept that all of us have played a role in the poor state of our nations, and the debts which have been created.
• I was prompted to write, because I often get asked for my views on the current economic crisis - by people who are not economic experts - and I try to explain it in “lay-mans” terms, because most smart commentators use a language which is hard for the “man in the street” to completely comprehend. - Hell, most of our politicians don’t understand it!
• For those who have some knowledge of economics and past events, the language may be overly simplified, but you know that It would taken too long to have to explain GDP, ROI, Keynesian economics and Bretton-Woods, and it would prove very exhausting trying to explain Kondratiev and Eliot-wave theories. I have written this in the same way as I would explain using extremely simple language, and tried to keep it as short as possible.
• Obviously the opinion in this is mine, based on my own research and analysis, and that is open to debate. As are my comments about human mentality, which I admit I am not an expert on.
• Anyway, you are most welcome to read through my views, and if you have any comments simply email me and ask.
• Regards Tony Westfallen
Global Economic Disaster
I have spent a lifetime monitoring economic and political events and utilizing the sciences of both technical and fundamental research, to formulate opinion on future valuations of various tradable capital markets.
Since 1974, when I took my first steps into the London offices of Merrill Lynch, my passion has remained firmly on providing institutions and individuals with valuable insight into what is going to occur in the future, by looking at the past.
I having worked in these markets during a period covering 5-decades, and in that period rarely have I seen a picture more worrying, long term ,than the one I have included here.
I have taken a lot of abuse for being consistently pessimistic since Oct 2007, But, I believe it is wrong to ignore the possible inevitable
This is a chart of the S&P Index, which for me confirmed we were about to go into a deep recession and the reason why my outlook has remained overall pessimistic since the beginning of 2008
Stock Market performance 1990-08
The Root of our Problem
There are 2 things that people today really do need to understand.
1. What is happening today is not the problem of today’s politicians. It is the problem of events going back 30-years.
2. Whilst politicians create the economic environment, it is up to the individual how they look after their own affairs.
Just like the Lady in these headlines:
We have all lived through incredibly prosperous times, and we all mistakenly thought our wealth would last forever!
Who is responsible?
• The easy answer to this question is: We all are!
• Anyone old enough to be reading this article, was born into a period of great prosperity. And it would not be unfair to state, that the older you are, the greater the share of the responsibility you need to carry.
• I will in this article point a finger at various leaders - both past and present - and directly attribute a large proportion of blame at their feet.
• And there is rightly, some condemnation of the banking industry. But, at the end of the day the question is academic. We should be asking ourselves, Are we going to take responsibility in the future?
Natural Cycles
• Before we all start beating ourselves up, we should understand that life is about seasons and cycles: “It doesn’t rain everyday, the sun doesn’t shine everyday”. There are periods of economic growth and there are periods of economic contraction.
• The swings between the extremes of these cycles is often relatively short and we can cope easily with those smaller changes.
• However, there are cycles which take decades to reach their extremes, and because they extend beyond our life-times, we simply fail to recognise them.
• Or choose to ignore them!
Major cycles. The above chart documents the last 250-
years of growth and contraction in our economic advancement.
Natural Behaviour
• “To err is human”. But to forgive?• There are also cycles in human behaviour
which we might be advised to accept.
• A poor man works hard, a hard-working man becomes rich, a rich man becomes fat and lazy, a lazy man becomes poor...and so it starts again. This is a generalised cycle, but many will recognise the observation.
• Most of us will claim to be an exception, and others will point out various exceptions, but few can say this example of a human cycle lacks merit.
• So, if we have lived through historically, very prosperous times...
• Where are we now within this cycle?
No one likes to be called “fat”. However, according to the OECD, 68% of
Americans and 53% of Europeans are currently, clinically overweight.
Political Cycles
• This is a matter of ideology, so it is much more difficult to define, but there are political cycles.
• “No empire last forever”, is a favourite quote of mine, but we also see books about the rise and fall of capitalism, and the rise and fall of communism.
• Today, we put much value on social democracy, which is now verging on being unaffordable and hence, unsustainable.
• So why should we expect this political doctrine not to also rise, and then fall.
• Indeed, out of poverty we tend to see a new extreme “politic“ surface.
• Whether this will be on the right ,or to the left, is yet to be seen...
It is a simple fact that 75% of European laws are made in Brussels by Social
democrat politicians who are not broadly supported by the masses.
Also, as there is no structured alternative to this “Oligarchy”, democracy is being
undermined and eroded.
Corporations and Politicians
• I would suggest that over the last 50-years, the increasing control over our economies and business practices, by political forces, has brought us to where we are today.
• Big government has facilitated - for its own reasons - the creation of very big businesses. It has reached a point where countries can now be destroyed by the corporate sector, and corporations can be destroyed by governments.
• This may seem like a balance, but there is an old African saying: “When elephants fight it is the grass which gets damaged!”
• Indeed we are no longer the grass-roots, we are simply the grass!
Globalisation
• On the face of it, “Globalisation” was supposed to be for the benefit of those in the “West”, who aggressively pursued and promoted it.
• The idea was based on the “west” being able to obtain cheap raw materials and opening large new markets for its industries.
• However - as we are seeing - this was a massive and arrogant error which has badly back-fired.
• Those countries with big markets, Brazil, Russia, India and China, with their cheap raw materials and cheap labour, have proven much more “clever“ than they were credited with, and have hi-jacked all the benefits coming from globalisation,.
• This has cost us jobs and income, and is ultimately, sucking from us all of our wealth.
Compare growth in the BRIC nations with the growth – or lack of it –
in the industrialised world.
Public Sector• There is much “finger-pointing” from those
employed in this sector, at those who are commercially successful.
• But the truth is, the Public sector is far too inefficient, and the cost of it is far too large. Hence, in the main part, unsustainable.
• The cost of this sector is the direct cause of our economic problems, and its massive “socialist” membership is now damaging our progress through protest.
• It is unnecessary for the Government to employ so many expensive “managers”.
• It only happens because we have had too many laws, which is too much interference in our lives. It is very obvious the public sector should be massively reduced, and forced to work “within” an affordable budget
• This tax burden, destroyed private jobs and through employing too many unproductive people, has bankrupt too many nations.
This is a chart of government spending going back to 1990.
This was a massively prosperous period. But, even though the government was
raising more in taxes, it should have been cutting public expenditure,
not increasing it.
Private Sector• This is business: it is private people who
risk for profit, and supply services and goods
• This sector creates wealth, without draining the national coffers. This is the sector which drives economic growth and it would work much better, if government treated it fairly.
• Over regulation and taxation has done severe damage to this sector.
• And amazingly, whilst governments continually focus on those few in this sector who “service” wealth creators - their friends the bankers. It is completely ignoring the needs of those who actually create the wealth - industry.
• This is why bankers are getting richer, whilst jobs are being lost. It is politicians greed!
• Remember in Europe, over the past 15-years; 75% of the “debilitating” laws have been made in Brussels.
Want a job in the private sector?This is a chart of Industrial production in the EU.
Household Debt• We can only behave according to what we
know and experience.• Industrial advances made our jobs easier
and with “more money for less work”, we all believed we were living on an “endless” gravy train.
• Even those who were unemployed were given money for “free” and we were all proud to live in societies were we could do this.
• Financial security “was” not a big problem and if we had a liquidity problem, the banks were always willing to give us a loan, because we were all confident in our future.
• The problem was, we felt “entitled” to a bigger house; a newer car; and 3-foreign holidays a year, and if we didn’t have the money, to afford it, we could borrowed to pay. - And, how we borrowed!
• But, now the jobs have gone, so has the money.
Prosperity caused liquidity and this encouraged debt.
The problem now is making the payments, when the prosperity has
disappeared.
Sovereign Debt• For over 50-years most western
governments have lived with debt, and because their economies were growing, repayment was rarely an issue.
• Our problem began when governments borrowed increasing amounts of money - instead of saving it - during periods when the economy was growing.
• During periods of economic growth governments should use the additional tax income to reduce debt.
• They chose for political reasons to expand expenditure - purely because it would help secure their power-base. And now the debts are being “called in” many countries do not have the “reserves” to repay or finance debt
• Those who borrowed too much in relation to how much wealth their people produce are suffering the most. It is contagious due to those who loaned for gain!
The Failure of the EU• Whilst I approve of the concept of a
European Common Market, its “grandchild” is proving to be an ignorant and costly brat!
• In my opinion, the expanse of powers and over enthusiastic interference in business activity emanating from Brussels is a major contributor to the collapse of the global economy.
• Its development and growth was a massive burden to the tax payers of Europe. It falsely, supported unadvisable loans given to national governments, and it created laws which penalised industrialists in Europe, which has caused a massive lose of jobs.
• Add to this, it created a currency which was doomed from the beginning, because their was no wealth to support it. I have to blame the EU, for playing a major role in designing or adding to the demise of our economies.
Industrial growth and European wealth has been completely destroyed by the over
enthusiastic, but poor decision making, by those working in the EU government.
The Growth of China• Chinese growth was financed by us. Our
banks invested in Chinese industries purely because our expensive labour made them more profitable!
• And it was also us, who were the major buyers of these cheap “slave-labour” products.
• Through our activities, we destroyed our own manufacturing base, destroyed many jobs, and through our spending and investing we sent our wealth to the Far East.
• This started years ago, when America and Europe urged China to join the WTO, and by the time we realised it was a mistake it was too late.
• Today, no one in power is openly talking of protectionism, because we all “owe” money to China.
We created and financed a strong Chinese Dragon
and now everything it does is aimed at squeezing us dry!
The Euro• As stated earlier, the creation of the Euro
currency was a complete mistake both in design and implementation.
• It was created in a rush - too soon after the creation of the EU - and was adopted without there existing an established pan-European Finance Ministry. Which was “total madness” and everyone knew it!
• A “finance ministry” would not be supported by national politicians, as it would take away their control over their tax revenues.
• The EU created the ECB, which was only responsible for setting the “one-size-fits-all” interest rate for the currency. But with no fiscal union - and because they placed fiscal limits which they never properly policed - the Currency was always a threat to the economic stability for the countries which used it – And ultimately disastrous!
The strength of the Euro tried to cover over the defaults in the Greek economy, and others,
but it proved impossible to cover increasingly large problems
EU Interest Rates• When borrowing from a bank we all have to
pay interest. This is gauged on the risk we represent and the interest rate applied to our currency, plus of course a small profit for the bank.
• The interest rate is normally kept low enough so people can afford to repay loans, yet high enough so the lender will be attracted to lend.
• Lending to sovereign nations is normally over a long timescale, this is obviously more secure than lending to an individual, However, the strength and outlook for the countries economy comes into play -The EU failed to accept that this is different for each country.
• With the EU being supported by the outlook for German and French exports -other, poorer countries were able to borrow more money -10-years ago - than their economies warranted.
• And more than they can afford today.
The interest rates were artificial unified in Europe, at a ridiculously low level, but eventually the markets would take them to more realistic levels based upon the true strength of each individual countries economy. The markets are always right!
What we said so far...• Firstly, the stock markets and economy actually reached its peak at the end of 1999.
However, most people didn’t see it or realise it, because their countries continued to flourish due to the jobs created by their governments, who had no consideration when it came to how much they borrowed.
• The EU knew about this, but instead of addressing the problem by doing something about it they chose to ignore it, because of politically expediency.
• More recently, the EU has dithered over our financial problems, because a weak Euro is helping Germany and France to export.
• All things have to move according to their nature, and we cannot change that - the problem is our politicians say different.
• Past politicians have a big responsibility for the current crisis, as do - to a lesser extent - our bankers. But we all have played a role in its development.
• We did become lazy, wanting more for working and producing less, and when we tried to secure this through “globalisation” it back-fired on us.
• Economic cycles occur over various time-cycles and every 60-70 years we see a big one. This means that their is no short term solution to our current problem. So whilst politicians look at financial issues, we need to address what the future holds and how we will survive during the downturn.
Civil Disorder• Whilst we are still looking at the “Arab
spring” and ignoring our own demonstrations, I expect, that the riots around Europe will continue to escalate through 2012, with austerity measures doing more damage to the lives of people.
• Whilst protesting is our right, it will not solve anything, because whoever comes to power will be unable to solve the problem; defaults must happen, and with it the Euro-zone will change, all of which is going to be costly.
• If the EU uses the current crisis to unify Europe further, it may prove a massive mistake. We are already seeing disagreements between the north and the south, with Eastern Europe also adding to the arguments.
• I believe unification will eventually lead to rebellion, but the growing distrust in Europe may stop the EU going down its current path.
In difficult times people try to take care of “their own”.
Outsiders become unwelcome and “tribalism” returns.
The EU can make laws, but in bad times they cannot change human nature
Inflation• We hear from many people that this will not
happen because demand is going to fall.• Sadly this is not true.• Whilst the west may see lower consumption
the BRIC countries will continue to consume, and their populations are growing.
• Energy and metals are already scarce, and food production is increasingly low, so commodity prices will be underpinned whilst our currencies devalue.
• Unless a country can produce wealth - which is very unlikely, now that we have no investment capital – our economies and the value of our currencies must drop and the cost of imports will rise.
• This is inflation and it will be very dangerous to raise interest rates to battle this, because it will create millions of people home-less.
• But don’t discount that our banks will raise interest rates.
People have it wrong about inflation. As America will find out when they see what effect QE has on their economy, once the dollar is no longer the reserve currency.
(Google “Bancor”)
Too Big to Fail• We currently have a scenario where
although countries are going bankrupt, we have our governments doing more to protect our banking institutions.
• The rationale behind this is that they do not want to see a complete collapse of the banking system!
• Sadly, Banks are (or should be) part of the private sector, and as a business, those who work poorly should be allowed to fail. (In fact, if no one has money, why do we need banks?)
• The fact is we do need banks, but we don’t need the massive investment banks we have today.
• In the last depression the top 6-banks had 17% of the capital, today the top 6 have 63%, if they fail it is a disaster, but no one should be immune, and no one isn't!
We cannot expect the small man to carry more debt, to support big banks,
its completely upside down!
Simply to Big• Most anger so far has been aimed at our
national governments. But we must not allow foreigners – by which I mean the EU – to use this crisis to destroy our national sovereignty any further.
• The EU growth has made things worse, and that is no reference for giving them more power and control. - We must re-take control of our nations, shrink the problems and address them one by one.
• Not everyone will succeed, but those who do, could help support those who don’t. Failure to separate nations, guarantees contagion and will weaken and destroy us all
• The EU say if we don’t stick together the outlook is bleak.
• Well its beak anyway, so why worry!
• At least if the EU collapses, that is one less bill that we will all have to pay!
We have wasted 60-years and billions upon billions of Euro’s on this
failed EU experiment. They have not done anything
positive with the power and control we have given them, so we should
take it back!
What is our future security• It is no good listening to economists and
politicians, whose main solutions always involves giving them more power and money and us assuming more debt.
• We need to be more productive and more protective as a nation. - “Eat what we grow and grow what we eat” Farmers must farm. and fishermen must fish!
• If countries went ahead on this basis, we would probably find that the south of Europe would do far better than the over-populated north.
• We must also limit imports, to stop the out-flow of wealth and allow for local entrepreneurs to create local jobs.
• Self-sufficiency is a goal promoted globally, but it is not only a matter of just energy, we must also sustain our food supplies, our water and our jobs.
The cracks in Europe are starting to show, if we cant afford to repair them, we
must protect ourselves and our loved ones, before it collapses on our heads!
Potentials and Problems• Profits come from Investments in agricultural
land, plus water and food.
• Chinese Population tops out in 2025, which will mark a return to growth and stability.
• North European countries suffer years of internal strife as nationalism increases; European Benefits systems collapse; Millions of White’s emigrate to Africa
• Major investment banks collapse and we see a return to old-fashioned banking.
• Poverty promotes a return to “family values” and we see more community service.
• Air travel collapses.
• MENA economies take-off due to energy self-sufficiency and colonial control of Africa.
• BRIC and GCC countries rule the world.
• Russia expands to create its own trading BLOC.
• Global reserve currency is backed by Chinese Gold.
Light at the end of the Tunnel• Politicians lie and Bankers cheat, but
nature is the truth. • Although we are inclined to follow our
leaders, they have proven unworthy of our trust. We must stop playing their games.
• This article is very pessimistic over the near term, but that being said, there is going to be light at the end of the tunnel.
• Early in this article I wrote that our lives run within cycles. At the moment we are starting into a down trend, but eventually that will turn and the economy will improve, albeit, probably not in a way we design.
• As bad times always last longer than we like, some of us may not see any real improvement. But I believe we owe it to our children to prepare them for both the bad times - and the good times ahead.
It is not nice to be so pessimistic. But to be blindly optimistic when we are surrounded by so many
problems is also not bright.Being prepared for the worst and it not happen, is far better than being
unprepared and getting hurt.
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