Stop Digging

Created on 6/9/2008

Today the German leader, Frau Merkel, appears to have broken ranks with her peers in the European Union. Just a couple of days ago in an emergency summit of the major EU economic powers it was agreed that we would act together. Now, it seems, that Germany has decided to follow several smaller European economic powers and issue an unlimited guarantee to its personal bank depositors. This, if true, and right now the lines to Berlin must be buzzing, is another break in the wall against widespread, incipient panic among the central bankers.

To tell the truth, even without this problem, we are looking at such severe forecasts for employment and the economy that these are going to be hard blows for us all to absorb

We are facing about 5 to 10 years of financial rations of bread and water unless we get very lucky. We might have had about all the luck we were due when this collapse in confidence didn't happen about 5 to 10 years previously, when I started to predict it.

The economy being so buoyant was simply a mirage that was maintained by wishful thinking. The reality is we are not making enough stuff and have been pump priming ourselves with the "knowledge economy" or as we call it in the UK, the "creative sector". That element plus the financial sector itself has been propping up the Anglo Saxon economic global success story of the recent past and it was a totally unrealistic expectation that we can maintain ourselves at our present levels of consumption when we don't make much else (in proportion to our economic size) but puff and fluff.

Now, if it is accurate that Germany, Iceland, Ireland and Greece have cut and run by declaring a total guarantee for all the depositors in their banks we have the beginnings of the isolationism that led to the making of the Great Depression. The countries that have not given such blanket guarantees will now have to either do so or go under, or the governments in the countries that haven't will have to force the ones that have to reword those guarantees or we will all get financially slaughtered. This is seriously bad news and they need to get onto it today or the market drop of several percent in the first hour of trading in London just now will look like nothing.

By the way this was a direct breaking of her promise by Frau Merkel the Chancellor of Germany who assured the other major leaders of Europe that she wouldn't take any such action and her implication was that anyone who did was a selfish idiot. Reports indicate that she gave that promise on Saturday. What prompted her to break that promise was the news of later that same day, when Germany's second biggest mortgage bank, Hypo out of Munich, had a rescue package collapse on it. This was "corrected" yesterday at about the same time when Merkel apparently converted to seemingly short sighted and idiotic economic nationalism.

It's like I said to a pal who wanted to go with me to a bank to raise some funding for a good new business, and I said to him that if a bank won't lend to another bank now is not a great time to go seeking a loan, however good the proposition is, and whatever security you can provide. If that is the case, then businesses will start to go bust in big numbers, and these are the small businesses, which supply by far the largest number of jobs in the economy. That sector starting to unravel will cause a concomitant loss of jobs and of course has a knock on negative effect.

Interest rates will therefore be forced down in the short term, and we might well go the way of the Japanese economy in the late 80's through the 90's in which they suffered from stagflation. Let's hope we have learned enough from their experience not to repeat those mistakes.

The solution can only be a total rethink of some parts of our economic model led by international cooperation and some central players of stature. Looking around just now, I think we are in for bigger problems, as I don't see any FDR or Thatcher on the horizon. That doesn't mean we have to agree with every detail, but we need a man (or woman) with a plan, a vision, powerful charisma, and clout to push through radical new ideas to push us out of this huge pile of effluent or we are going to wallow in it for a long time. I hope and pray I am wrong about all of this, but we are now in the hole, and we are still digging.