Sunday 29 January 2012

The Global Debt Crisis -Whose Fault?

So whose fault is the global debt crisis?

When this question is asked on the TV the standard response seems to be 'greedy bankers'. While they certainly played their part through creation of highly complex tradable debt instruments and excessive use of gearing (debt), to place the blame squarely on their shoulders is laughable.

At the end of the day bankers are just people, and people respond to incentives. If they are given huge incentives to take big risks for short term gains, that is what they will do.

Are governments to blame?

To an extent yes, they are in charge of the legal framework that controls the bankers, so they should be held accountable to some degree for the breakdown of the system. It is clear that there is a limit to how 'free' markets should be. Rules and restrictions should be in place to curb the 'greed' of bankers and encourage them to take a longer term view of their strategies and actions.

There is however one set of players who I believe are far more responsible than bankers and government leaders for causing this mess.

They are also a group that has pretty much avoided any apportionment of blame whatsoever.

They are the Bank of England, the US Federal Reserve and the European Central Bank.

All three have been guilty of keeping interest rates ultra low during boom years when really they should have been much higher.

The central bankers have been acting under the false pretence that it is possible for a western economy to grow its GDP 3% a year indefinitely. When figures dropped below this, the Central banks dropped their rates to stimulate new growth.

What this did, through cheap and easy mortgage lending, was create the biggest property boom that the world has ever seen. They did not factor in the industries cyclical nature, and didn’t envisage what might happen when prices eventually toppled.

The scary thing is that these powers that be do not seem to have learnt from their mistakes, they have accepted no blame and are still yapping on about the need for growth to pull us back from the brink.

Growth is all well and good, but it must be healthy, sustainable growth. Not artificial growth that is derived from excessive borrowing of cheap money.

I personally don't think it is possible for a Western economy to grow much more than 1/2% a year healthily. The Bank of England and their global counterparts should take a long hard look at their growth figures and come up with better targets.

Monday 23 January 2012

Euro Zone Mess Continued...

To recap on my last post, and add a few points, here is a little list of the pitfalls of the European single currency as it stands.

1. The currency of individual countries will not depreciate when experiencing times of hardship. Currency depreciation is a useful tool that can give disadvantaged economies a competing edge.
2. Countries can no longer set their own interest rate. Is the ECB rate really what they need?
3. No common Eurobond, this means that government borrowing costs across the eurozone can vary dramatically from country to country.
4. Vastly different legal systems, rules and ethics between countries, thus making integration difficult and somewhat unfair.
5. No defined system for the re-distribution of wealth from poorer countries to richer countries.

To my mind, as it stands in its current framework, there is no way the single currency can survive.
If it is to ever work in the long term the above points need to be addressed. Can this be done?

Points 1 and 2 cannot be rectified. Points 3, 4 and 5 however can.

A common eurobond must be created thus taking pressure off the debt servicing of countries like Greece, Portugal etc.

There needs to be huge fiscal integration between countries. Same tax laws, same tax collection system, same retirement age, same working conditions laws etc. Why should Germans have to retire at 68 whilst many Greek public sector workers retire in their early 50's?

There must be a system of wealth redistribution from richer nations such as Germany to poorer nations such as Greece.

If this were to be successful we would basically end up with a United States of Europe, only then could the Euro be seen as a triumph.

Will this ever happen? It's up to the richer countries really, Germany will need to step up and take responsibility for the poorer nations. At the moment this is looking highly unlikely.

Monday 16 January 2012

Euro Zone Mess!

Ok, my first blog, and i'll jump right into the deep end and cover the Eurozone debacle a little.

I'll try and keep this short, but its quite a complicated topic, so here goes! Basically my view on the Eurozone 'experiment' is that it cannot work in its current format, and will end up being an efficiency drain on all members that use the single currency.
The weaker countries will continue to suffer as a result of using a currency far too strong for their economies to stomach. Just look how bordering countries like Turkey are prospering from a huge influx of tourism that would otherwise be weighted more towards Greece, Italy, Spain etc if their currencies were more competitive.
In contrast, very strong Economies like Germany's are benefiting as the euro is weaker than the DeutchMark would be if they had kept their old currency. Small wonder there has been a huge boom in German car sales since the Euro's inception, they have a significant export advantage.

Will cover more on this topic in my next blog :)