Debt Rattle Mar13 2014: The Demise Of The Ponzi Democracy

By: The Automatic Earth


Carl Mydans Auto transport at Indiana gas station. May 1936
Britain’s Institute of Economic Affairs (IEA) recently issued a report on the future of pensions and healthcare that reads as one big warning sign. But the chances that the warning will be heeded are slim to none, simply because the task is too daunting for both politicians and their voters to even begin to contemplate.

No politician who tells the truth about the report’s contents has a chance in frozen over hell of being elected, and thus the issues, which have been many decades in the making, will simply continue to be ignored by everyone. Until the dam breaks and perhaps the first shot is fired. But then it will be way too late. Not that it isn’t already. It’ll be interesting to see how people across the board claim ignorance and innocence, but it will of course do nothing to even come close to solving anything at all.

And frankly speaking, there are no solutions available within the present political system that could be executed and still let people get away relatively unscathed. We seem to have reached an inherent and built-in boundary and limitation of the democratic system, an event horizon of which we are bound to see a lot more going forward. What some 20 years ago Jay Hanson phrased as

“Democracy only works until people realize they can vote themselves an ever bigger piece of the pie”

IEA program director Philip Booth says in these words:

For too long people have voted themselves benefits to be paid for by the next generation of taxpayers, not by sacrifices that they will make themselves.

It truly is democracy as a Ponzi scheme. A development that has been so carefully and utterly neglected and ignored that bringing it out into the open risks evoking such severe denial that entire societies could be ripped to shreds, with one group teaming up against the other in clashes that can easily turn violent. Or, in Booth’s words:

We have never been in a situation like this before. It is quite possible that we will not find our way through without serious social breakdown and/or mass emigration of the most mobile and productive people.

And it all seemed to be going so well for so long, with cars and smartphones and far away vacations and retirement bungalows in the sun for – almost – everyone. People believed it because they wanted to believe it, and politicians were all too eager to prolong the dream that for the first time in history everyone could live like kings and queens of old. Cheap energy was one leg of the dream, ignoring future consequences of present behavior was another. Booth:

“The underlying problem is that successive governments have made promises which can simply not be honoured from the existing tax base. The electorate is grazing a fiscal commons at the expense of future generations … “

The price must now be paid. There is no more postponing the inevitable. First, retirement age will go to 70, then 75, and then the point will come when there’s no money left for any pensions or other entitlements. We will also return to large numbers of people dying of entirely preventable afflictions, simply because healthcare systems become unaffordable, because the base of people paying taxes shrinks, while the number of those who need care rises exponentially as the population ages.

Here’s the Telegraph article the quotes come from:

UK faces ‘crippling’ tax rises and spending cuts to fund pensions and healthcare

Britain faces “crippling” tax rises and spending cuts if it is to meet the needs of an ageing population, according to the Institute of Economic Affairs. The IEA calculated the Government would need to slash spending by more than a quarter or impose significant tax hikes because official calculations had failed to factor in future pension and healthcare liabilities. “As populations age, tax bases will grow more slowly while government spending rises faster,” the report said.

… the think-tank said Britain faced tax rises equivalent within just two years to more than 17% of GDP – more than £300 billion ($500 billion) – in order to meet all future spending commitments. This is larger than the entire annual NHS budget and would increase taxes from 38% to 55% of national income.[..] … tax increases of this magnitude would be “impossible” to implement “without choking off economic growth and actually reducing tax revenues”.

Can you imagine such tax raises? While the economy is in the doldrums? Me neither. But that would mean:

In the absence of further tax hikes [..] total spending would have to be cut by more than 25% or health and welfare expenditure by 53% compared with the current implied level if all future spending was to be met out of tax revenue.

[..] … it said policies were being implemented too slowly and were “inadequate” on their own [..] … policies to address pension saving and healthcare costs were needed now or the problem would quickly grow out of control. “Without significant changes to spending levels, huge sacrifices will have to be made by future generations either through significantly higher taxes or reduced benefits [..]

The IEA calculated that delaying crucial pension and healthcare reforms by just a few years would dramatically increase the burden because of growing debt interest payments. It said the ratio would increase from 13.7% of GDP in 2010 – already higher than the EU average of 13.5% – to almost 17.1% by 2016 if no policy adjustments were made.

People will be forced to work longer and longer, till they’re 75, 80 and so on. And they’ll be forced to pay a fast growing part of their healthcare bill themselves. And even then both healthcare and pension systems have no chance of surviving in the long run. Because too many people have been promised too much for too long.

And just in case you were thinking that raps her up, here’s another piece of fine news from yesterday:

UK Interest Rates Could Rise Sixfold In Three Years (Telegraph)

Interest rates will rise six-fold by 2017 as Britain’s economy becomes one of the fastest growing in the developed world, the Bank of England Governor said on Tuesday. The increase to more “normal” levels will be welcomed by many savers who have faced record low rates for more than six years, but is likely to plunge many borrowers into financial difficulty. Mark Carney said that Bank rate could reach 3% within three years, six times the current 0.5%.

[..] Industry calculations suggest that an increase of 2.5 percentage points on a typical £150,000 repayment mortgage would push up monthly payments by around £230 a month. For interest-only mortgages, the rise would be even steeper. The cost of servicing an interest-only loan that tracks the Bank rate plus 1% would jump from £188 a month to £500.

Nationwide, one of Britain’s biggest mortgage lenders, said last month that the long period of low rates had left a generation of house- buyers with no experience of higher borrowing costs, leaving some at financial risk. Around 8% of all mortgage- holders currently have to spend more than 35% of their pre-tax income paying off the loan. Bank data suggests that this proportion would double if rates rose by 2.5 percentage points.

Mr Carney said the Bank was now carrying out more research into how many borrowers are “most vulnerable” to higher rates.

Yup. Your taxes will go up, slowly at first because the government will delay dealing with serious issues as long as it can get away it, and faster later when they have no such choice left. Meanwhile, interest rates will rise, which is bad news if you have debt, which is about everyone. And it’s not just your debt: there’s a lot of government debt that will need to be serviced, and guess how we’re going to pay for that? Raise taxes.

This simple pattern is not exclusive to Britain at all of course, but then you know that. This is what will happen in every western – formerly – rich country. And you can therefore safely ignore any proclamations about recovery. The first major hit, developing as we speak, is Japan, where people are more cautious and fearful and perhaps better informed. The Japanese started cutting back on their spending 20 years ago (they stopped buying things they didn’t need), and are now in a deflation that no stimulus will get them out of anymore (it’ll just make it worse).

But at least they have savings. In most formerly rich countries, people have counted on entitlements instead of savings. And now those entitlements turn out to be based on elaborate Ponzi schemes, sanctioned by successive governments that all had one thing in common: short term views.

David Stockman knows a thing or two …

Yellenomics: The Folly of Free Money (David Stockman)

The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008. Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon.

Let’s see. The Russell 2000 is trading at 85X actual earnings and that’s apparently “within normal valuation parameters.” Likewise, the social media stocks are replicating the eyeballs and clicks based valuation madness of Greenspan’s dot-com bubble. But there is nothing to see there, either–not even Twitter at 35X its current run-rate of sales or the $19 billion WhatsApp deal. Given the latter’s lack of revenues, patents and entry barriers to the red hot business of free texting, its key valuation metric reduces to market cap per employee–which computes out to a cool $350 million for each of its 55 payrollers. Never before has QuickBooks for startups listed, apparently, so many geniuses on a single page of spreadsheet.

Indeed, as during the prior two Fed-inspired bubbles of this century, the stock market is riddled with white-hot mo-mo plays which amount to lunatic speculations. Tesla, for example, has sold exactly 27,000 cars since its 2010 birth in Goldman’s IPO hatchery and has generated $1 billion in cumulative losses over the last six years—–a flood of red ink that would actually be far greater without the book income from its huge “green” tax credits which, of course, are completely unrelated to making cars. Yet it is valued at $31 billion or more than the born-again General Motors, which sells about 27,000 autos every day counting weekends.

Even the “big cap” multiple embedded in the S&P500 is stretched to nearly 19X trailing GAAP earnings—the exact top-of-the-range where it peaked out in October 2007. And that lofty PE isn’t about any late blooming earnings surge. At year-end 2011, the latest twelve months (LTM) reported profit for the S&P 500 was $90 per share, and during the two years since then it has crawled ahead at a tepid 5 percent annual rate to $100.

So now the index precariously sits 20% higher than ever before. Yet embedded in that 19X multiple are composite profit margins at the tippy-top of the historical range. Moreover, the S&P 500 companies now carry an elephantine load of debt—$3.2 trillion to be exact (ex-financials). But since our monetary politburo has chosen to peg interest rates at a pittance, the reported $100 per share of net income may not be all that. We are to believe that interest rates will never normalize, of course, but in the off-chance that 300 basis points of economic reality creeps back into the debt markets,that alone would reduce S&P profits by upwards of $10 per share.

America’s already five-year old business recovery has also apparently discovered the fountain of youth, meaning that recessions have been abolished forever. Accordingly, the forward-year EPS hockey sticks touted by the sell-side can rise to the wild blue yonder—even beyond the $120 per share “ex-items” mark that the Street’s S&P500 forecasts briefly tagged a good while back. In fact, that was the late 2007 expectation for 2008—a year notable for its proof that the Great Moderation wasn’t all that; that recessions still do happen; and that rot builds up on business balance sheets during the Fed’s bubble phase, as attested to by that year’s massive write-offs and restructurings which caused actual earnings to come in on the short side at about $15!

In short, recent US history signifies nothing except that the sudden financial and economic paroxysm of 2008-2009 arrived, apparently, on a comet from deep space and shortly returned whence it came. Nor are there any headwinds from abroad. The eventual thundering crash of China’s debt pyramids is no sweat because the carnage will stay wholly inside the Great Wall; and even as Japan sinks into old-age bankruptcy, it demise will occur silently within the boundaries of its archipelago. No roiling waters from across the Atlantic are in store, either: Europe’s 500 million citizens will simply endure stoically and indefinitely the endless stream of phony fixes and self-serving lies emanating from their overlords in Brussels.

Read more …

Russia Said to Ready for Iran-Style Sanctions (Bloomberg)

Russian government officials and businessmen are bracing for sanctions resembling those applied to Iran after what they see as the inevitable annexation of Ukraine’s Crimea region, according to four people with knowledge of the preparations.

Iran-style retaliation from the West, which would include freezing Russia’s foreign reserves, banking assets and halting lending to companies, is being treated as an unlikely worst case, according to the people, who asked not to be identified as talks are confidential. Still, officials are calculating the economic cost of a sanctions war with the West, the people said. “If Russia begins to answer sanctions with sanctions, it will be a pure loss for the country,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said by phone. “More than 40% of consumption is imported goods.”

Some Russian political leaders are hoping that President Vladimir Putin will moderate his response to the crisis, the people said. Putin is consulting with the security forces and military about Ukraine, and some officials are afraid to voice opposition to what they see as a course he’s already chosen, two of the people said. Russia retaliating with sanctions against the West could wipe out 10 years of achievements in financial and monetary policy, one of the people said. Such escalation could erase as much as a third of the ruble’s value, another said.

The ruble has slumped 9.8% against the dollar this year, the worst-performer after Argentina’s peso among 24 emerging-market currencies tracked by Bloomberg. The yield on Russia’s February 2027 ruble bond was unchanged from yesterday’s record-high close of 9.36%.

The Ukraine crisis triggered the worst standoff between Russia and the West since the end of the Cold War after Russian forces seized the Crimean peninsula. German Chancellor Angela Merkel said today Russia risks “massive” political and economic damage, after saying yesterday that a round of European Union sanctions is “unavoidable” if Putin’s government fails to take steps to ease tensions. [..]

The government is in talks with Russian billionaires and state companies about risks they face in case of Western sanctions, the people said. The Kremlin needs to know which companies are most likely to be affected by fallout including loss of access to new foreign loans and the prospect of margin calls, they said.

Business is not yet showing too much concern about the possible sanctions, according to three top executives who took part in the meetings. The EU, Ukraine and Russia are economically dependent on each other in many regards, so strict sanctions will be hard on all sides, Putin has said. “In the modern world, when everything is interconnected and everybody depends on each other one way or another, of course it’s possible to damage each other — but this would be mutual damage,” Putin told reporters March 4.

The Russian economy’s prospects in a “difficult global economic environment” were the topic of a closed meeting between Putin and senior officials yesterday in the Black Sea resort of Sochi, Peskov said by phone. Putin yesterday urged the government to ensure Russia’s “ability to react immediately to internal and external risks.”

The Russian government is also in talks with companies about speeding up state support in the form of guaranteed loans to reduce potential damage from sanctions, said two of the people. Business leaders have asked for a meeting with Russian Prime Minister Dmitry Medvedev to discuss the situation, the people said.

Read more …

The Truman show meme shows up more frequently, and it’s not a bad analogy.

Hedge fund managers face up to ‘Truman Show’ markets (FT)

In the Truman Show, the late nineties Hollywood film, the eponymous character lives a seemingly charmed world, snuggled comfortably into an American suburbia of white picket fences and crisply cut lawns. But gradually Truman starts to notice something is not quite right. He is actually trapped inside a film set controlled by hidden directors, and discovers to his horror that he is the unknowing star of the world’s most popular reality TV show.

The question some of the world’s biggest hedge funds are starting to ask is whether overly placid investors will also wake up to discover they are living in a “Truman Show market” – where central bankers’ ultra loose monetary policy has manufactured a fake reality that is bound to end. For Seth Klarman, the manager of the $27bn hedge fund the Baupost Group who recently coined the analogy in a letter to clients, investors have been lulled into a false sense of security that is creating an ever greater risk of a sharp correction.

“All the Trumans – the economists, fund managers, traders, market pundits – know at some level that the environment in which they operate is not what it seems on the surface,” Mr Klarman wrote in his letter, later adding: “But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end.”

But no matter how sceptical hedge fund managers may be, they find themselves in a bind. While the assumption that central bank bond-buying will continue for the foreseeable future has been a boon to broader markets, indiscriminately surging equities have made life frustrating for most specialised stock pickers.

At the same time other hedge fund strategies, such as making bets on interest rates and currencies according to views on the direction of the global economy, have faltered as markets have refused to obey previously presumed iron rules, such as money printing leading to devaluation. Of late these so-called global macro funds have retreated from such trades as their performance has suffered.

“Many hedge funds continue to predict this ongoing drift upwards in asset prices due to an implicit backstop from central banks, who want to believe they are omnipotent, and that when data is bad they can just turn on the taps again and make it go away,” says Anthony Lawler, portfolio manager at GAM, one of the world’s biggest investors in hedge funds. As a result, while many managers feel deeply uneasy with the lofty valuations attached to certain parts of the US stock market, and low returns offered by risky assets such as junk bonds, few are willing to step out just yet.

More recently, encouragement has been taken from falling correlations between assets, meaning some portfolio managers are confident they can start to exploit more effectively the pricing anomalies between better and worse quality securities. “The number of individual stocks mispriced to each other is high, there are some trading on vapour whilst others are still trading on reasonable valuations,” says Luke Ellis, president of Man Group, the world’s largest listed hedge fund. “Are there lots of cheap stocks? No, but on a long short basis there are opportunities.”

“The big question is when this is all going to change. From a purely intellectual point of view, it is interesting how central banks will reverse their policies. From a market point of view, it is uncertain and complicated.”

Sir Michael Hintze, chief executive and founder of CQS, one of Europe’s largest hedge funds, has argued that loose central banks have actually increased the riskiness of markets as a result of their policies forcing too much money into the same assets, meaning any corrections are likely to be sharper than normal. “Everyone is thinking the same and being driven into the same trade,” he wrote in a note to clients. “Shifts when moving from one state to another can be difficult and abrupt. It is not healthy to have a ‘rigged’ market”.

Yet, for now, as long as markets continue to believe in the willingness and ability of central bankers to maintain current conditions, few hedge fund managers are ready to make any big bets against a reversal. “Few argue that equities are cheap on any metric, but the majority of hedge fund managers are opting to remain invested,” says Mr Lawler of GAM. The Truman Show market looks set to continue, even if an increasing number of participants have started to spot the cameras hidden behind the trees.

Read more …

America must get rid of the Fed and the big banks, or it will turn into a scorched landscape.

Engine Of Wall Street Profits Sputters In First Quarter (FT)

Wall Street’s once lucrative fixed income divisions are set for their worst start to the year since before the financial crisis, with revenue declines of up to 25% prompting banks to plan more redundancies on top of the tens of thousands of job cuts they have already made.

Citigroup and JPMorgan Chase have warned publicly that fixed income revenues – the engine of most investment banks’ profits since 2000 – will be down by double digits when they report first-quarter earnings next month. But other banks privately warn that their year-on-year declines could exceed 25% after both institutional investors and banks shied away from trading. The first quarter is traditionally a high point for revenues. “Effectively, the casino is empty this quarter,” said Brad Hintz, analyst at AllianceBernstein.

The top 10 banks are expected to make a combined $24.8bn of revenues in fixed income trading, which includes bonds, currencies and commodities, according to Morgan Stanley and Credit Suisse estimates, more than 40% below the first quarter of 2009 when the market rebounded sharply from the crisis.

Two of the top five fixed income divisions told the Financial Times they expected to respond by cutting more jobs because the market is worse than expected, with traders blaming patchy macroeconomic data, interest rate uncertainty, regulation that limits risk taking and worries about the situation in Ukraine. Analysts now expect Goldman Sachs to record its weakest first quarter since 2005 and JPMorgan Chase and Bank of America are forecast to see their lowest revenues since they bought Bear Stearns and Merrill Lynch, respectively, in 2008.

The weakness is expected to be even more severe among European banks such as Deutsche Bank and Credit Suisse, which are looking to meet new capital requirements by shrinking their balance sheets. “Anecdotally it seems Europeans are losing most share in the US itself and so are losing global diversification,” said Huw van Steenis, analyst at Morgan Stanley. Some US banks hope their European rivals will cede market share. “Those outside of the top five will have to think about if they can continue to be in that business,” said James Chappell, analyst at Berenberg.

New regulations such as the Volcker rule – which prohibits proprietary trading – and tougher capital requirements restrict the risk banks can take and are sapping liquidity, bankers say, even though final versions of the rules have not proven as harsh as some feared.

Four years after the outlines of the post-crisis regulation were put into place, traders claim that outstanding areas of uncertainty are hitting activity among big bond traders such as JPMorgan, Citi, Deutsche Bank, Bank of America, Goldman and Barclays. “There’s a significant amount of uncertainty about what the endgame is going to be,” said the head of trading at one bank. “We probably haven’t reached a peak of effort and management time. We’re not turning the page yet on regulation.”

Christian Bolu, analyst at Credit Suisse, estimated that US government bond trading volumes are down about 8% so far this year compared with the same period in 2013. Trading of mortgage-backed securities backed by the US government is down 41%, while corporate bond trading has increased by 12%.

Read more …

Funny to see how George Soros says Europe is the only place that got it right, while others, like Ambrose Evans-Pritchard here, say it got it terribly wrong.

Paralysed ECB leaves Europe at the mercy of deflation shock from China (AEP)

Most of western Europe is already in outright deflation. So are the Balkans, the Baltic states and the old Habsburg core. The Continent has left its flank open to an external shock from Asia. There is a high chance that this will occur as China attempts to extricate itself from a $24 trillion credit misadventure by debasing its currency to regain lost competitiveness and bail out its export industry.

The yuan has fallen by nearly 2% against the dollar since early January, and 4% against the euro. For all the talk of weaning China off chronic over-investment, Beijing engineered a record $5 trillion of investment in fixed capital last year – up 20% from the year before, and as much as the US and Europe combined. This has created a vast overhang of excess manufacturing capacity in the global system. It is coming our way in the form of a slow, powerful, deflationary undercurrent.

Europe’s headline price data understate the full deflation risk. Eurostat’s HICP index “at constant taxes” – stripping out the one-off effects of austerity – shows that 23 of the EU’s 28 countries have seen a fall in prices over the past seven months. “The risk of deflation is definitely before us,” said Olivier Blanchard, the International Monetary Fund’s chief economist.

By this measure, inflation since June has been running at a rate of -1% in France, -2% in Holland, Belgium and Slovenia, -4% in Italy, Spain and Portugal, -6% in Greece and -10% in Cyprus. Sweden and Switzerland are also in deflation. Germany rolled over in July. The UK still clings to a little inflation – now a precious commodity – but it too turned negative in September.

This is a nightmare for the debt-stricken states of southern Europe, still trapped in a slump with mass unemployment regardless of whether they manage to eke out the odd quarter of miserable growth. With Germany at zero inflation, they have to go into even deeper deflation to claw back lost competitiveness within EMU under “internal devaluations”.

This, in turn, plays havoc with debt dynamics through the denominator effect. Their debt loads are rising on a base of flat or contracting nominal GDP. It is a key reason why Italy’s public debt has risen from 119% to 133% of GDP since 2010 despite achieving a primary budget surplus, or why Portugal’s debt jumped from 94% to 129% (IMF data).

These countries have an impossible task, damned if they do and damned if they don’t. Mr Blanchard said their gains in competitiveness risk being overwhelmed by a rise in the “real value” of their debt. “The danger is that the second effect dominates the first, leading to lower output and further deflation.”

There is, of course, no magic line when inflation falls below zero. A recent IMF study said the effects become lethal for economies with high public/private debt loads – mostly over 300% of GDP in Club Med – even at “lowflation” rates. The European Central Bank is betting that this downward lurch in prices is a temporary blip due to lower energy costs, insisting that inflation expectations remain “firmly anchored”. The collapse of iron ore and copper prices over recent days – on China jitters – should puncture these illusions.

The ECB’s expectations doctrine is in any case a Maginot Line. “Long-term inflation expectations on the eve of three deflationary episodes in Japan were also reassuringly positive,” said the IMF. Indeed, they were a lagging indicator and therefore useless. “One needs to act forcefully before deflation sets in,” said the Fund, adding that the Bank of Japan was too slow to cut rates and boost the money base. “In the event, it had to resort to ever-increasing stimulus once deflation set in. Two decades on, that effort is still ongoing.”

BoJ governor Yasuo Matsushita said as late as January 1998 that there was “no reason to expect that overall prices will drop sharply and exert deflationary pressure on the entire economy”. As a result of this lordly certitude, Japan suffered shattering effects when the East Asia crisis entered its second and more deadly phase that summer.

The ECB’s Mario Draghi risks going down in history as Europe’s Mr Matsushita, as he continues to insist that EMU inflation today is merely where it was in 2009 (in the post-Lehman mayhem) and therefore benign, and that Euroland is not remotely like Japan. “The ECB has taken decisive action at a very early stage of this crisis,” he said. The proof is in the monetary pudding, and this shows that EMU is already in worse shape than Japan in early 1998 by a large margin. Private lending is contracting at 2.3%, the M3 money supply has ground to a halt and EMU-wide unemployment is stuck at a near-record 12%.

The ECB is by definition ferociously tight. Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, is right to berate the bank for betraying its primary duty, demanding €60bn of bond purchases each month before it is too late. “It is high time for the ECB to act. Otherwise Europe risks falling into a dangerous downward spiral,” he said.

Euro Intelligence said failure to act would be “an existential disaster for the eurozone” and a “shocking derogation” of the ECB’s mandate. Mr Draghi has bent over backwards to assuage the hard-money monks at the Bundesbank – much to the fury of one ex-ECB governor who told me he had become the “captive” of Right-wing German elites – judging that it would be too risky for the Latin Bloc and their allies to mobilize their majority voting power and force through a reflation policy.

His task has become even more complicated since the German constitutional court ruled last month in thunderous language that the ECB’s bond rescue plan for Italy and Spain (OMT) “exceeds the ECB’s monetary policy mandate, infringes the powers of the Member States, and violates the prohibition of monetary financing of the budget”. It also said the OMT is probably “Ultra Vires”, meaning that the German Bundesbank may not take part.

The ruling is not final – and does not prohibit ECB bond purchases as such – but it raises the bar for quantitative easing to a punishingly high level. While the Fed and the Bank of England were able to act instantly once it became clear that QE on a huge scale was imperative, the ECB is paralysed by politics, ideology and judges.

There have been dovish mutterings from ECB members over recent days but any action is likely to be confined (for now) to token gestures such as a negative deposit rate or easier collateral rules for banks, not the €1 trillion blast of QE that is so obviously needed immediately. The rise in the euro to €1.39 against the dollar tells us that markets expect nothing of substance.

Europe is left at the mercy of world events. The Fed is pressing ahead with $10bn of tapering each meeting, slowly forcing up the global price of credit and tightening the vice further for emerging markets. The bank has ignored the pleas for mercy from the developing world – still addicted to dollar liquidity – just as it did in the months before the Asian crisis in 1998. The OECD warned this week that the real impact of Fed tapering has “only just begun” and the effects threaten to ricochet back into Europe through trade and banking stress in emerging markets.

China is tightening as well in what amounts to a G2 monetary squeeze. It has been so successful that shadow banking virtually froze in February, prompting the central bank to step back in consternation at its own handiwork. Some have a touching faith that the Communist Party knows what it is doing, even though it is the same body responsible for just having blown the most spectacular credit bubble of modern times, more than a match for the pre-Lehman booms in Greece, Spain or Ireland in character and much greater in scale. I prefer the Chinese metaphor of feeling the stones beneath the water, their way of saying trial and error.

China will not collapse because the banking system is an arm of the state, but it will have to cope with the colossal malinvestments left from a hubristic five-year blow-off. Deflation is already stalking the country. Factory gate inflation has dropped to -2%.

We can be sure that China will seek to pass this deflationary parcel to somebody else, just as the Japanese have already done with their epic devaluation under Abenomics. The package will land in Europe, the one region that lacks a proper central bank and the governing coherence to protect its own interests. The implications for the depression-wracked societies of the Mediterranean are nothing less than calamitous.

Read more …

UK faces ‘crippling’ tax rises and spending cuts to fund pensions and healthcare (Telegraph)

Britain faces “crippling” tax rises and spending cuts if it is to meet the needs of an ageing population, according to the Institute of Economic Affairs. The IEA calculated the Government would need to slash spending by more than a quarter or impose significant tax hikes because official calculations had failed to factor in future pension and healthcare liabilities. “As populations age, tax bases will grow more slowly while government spending rises faster,” the report said.

In a stark warning, the think-tank said Britain faced tax rises equivalent within just two years to more than 17% of GDP – more than £300bn – in order to meet all future spending commitments. This is larger than the entire annual NHS budget and would increase taxes from 38% to 55% of national income.

Philip Booth, the IEA’s programme director, said tax increases of this magnitude would be “impossible” to implement “without choking off economic growth and actually reducing tax revenues. “The underlying problem is that successive governments have made promises which can simply not be honoured from the existing tax base. The electorate is grazing a fiscal commons at the expense of future generations,” he said.

In the absence of further tax hikes, Jagadeesh Gokhale, the author of the report, said total spending would have to be cut by more than one quarter or health and welfare expenditure by 53% compared with the current implied level if all future spending was to be met out of tax revenue.

<noframes>Interactive chart: Europe’s hidden debt pile</noframes>
While the IEA said increases to the state pension age would help to soften the blow of future tax rises, it said policies were being implemented too slowly and were “inadequate” on their own. Mr Gokhale said policies to address pension saving and healthcare costs were needed now or the problem would quickly grow out of control. “Without significant changes to spending levels, huge sacrifices will have to be made by future generations either through significantly higher taxes or reduced benefits,” the report said.

The IEA calculated that delaying crucial pension and healthcare reforms by just a few years would dramatically increase the burden because of growing debt interest payments. It said the ratio would increase from 13.7% of GDP in 2010 – already higher than the EU average of 13.5% – to almost 17.1% by 2016 if no policy adjustments were made.

<noframes>Interactive chart: How Britain could balance the books</noframes>
“We have never been in a situation like this before. It is quite possible that we will not find our way through without serious social breakdown and/or mass emigration of the most mobile and productive people,” said Mr Booth. The report also warned that governments would not be able to grow their way out of trouble, and were too often “fixated” on short term growth. It said while the Government’s decision to move assets of the Royal Mail pension fund had reduced short-term debt measures, long-term state pension liabilities had increased.

“The Government took the assets of the Royal Mail pension fund and gave the workers promises of government pensions in return,” the report said. “The explicit government debt was reduced but future government liabilities – in this case contractual – were increased.”

“Without reform, today’s young people are likely to be disappointed, either in terms of higher tax rates or in terms of reduced future benefits provided by government,” said Mr Booth. “The quicker the government changes policy, the more painlessly the situation will be resolved. For too long people have voted themselves benefits to be paid for by the next generation of taxpayers, not by sacrifices that they will make themselves.”

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See original article here: http://www.theautomaticearth.com/debt-rattle-mar13-2014-the-demise-of-the-ponzi-democracy/

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