The global crisis has three major elements to it:

  1. An aging population
  2. Slowing birth rates, and
  3. A rapidly expanding social welfare system.

These factors existed within a system that provided easy debt, both for households and for Government.  In other words, there was a greater squeeze on the running costs of society that was covered by the ability to borrow against future earnings, and future asset valuations, thus asset bubbles were inevitable without a tempering of the system that addressed one of our factors above.

The global nature of the crisis derives from an increased interlocking of the world’s financial systems which led to a greater expectation of higher living standards, putting pressure on the political system.  Consequently, both Governments and households began to borrow more and more heavily across the world to satisfy demands, both real and illusionary.  But without effort from below, the world was trying to solve the problem with the problem.  Efforts from below would typically include either higher birth rates and more economically active people, technological advances, or efficiency savings.

The global rally of the 1990s was mostly due to the speeding up of transactions facilitated by the internet, but that effect hit saturation point soon enough, and the benefit dwindled.  Shale gas offers a similar technological and efficiency boost, although it appears that the EU is Hell-bent on letting us enjoy the same shot in the arm as has been enjoyed by America over the last few years.

As the economic benefits of the internet globalization took hold, Governments used the proceeds unwisely, and squandered them on dead-loss ‘investments’ designed to make for short-term political benefit rather than for long-term structural reform.  Put bluntly, the Governments bought votes with shiny offices stacked with people performing non-jobs, while the social welfare costs ramped up at compound pace.

Once the global economy tipped, the Governments tapped up the markets for more cash, and hoped that growth and inflation would return and tomorrow would be a better day.  They increased the tenor of the IOUs, the UK issued 50 year Gilts, and Osborne has touted the 100 year bond to try and push the obligations further down the generations.  Growth failed to materialise, so they tried to hypothecate inflation, and erode the value of their own debt holdings by Quantitative Easing.  G8 has printed $18 trillion of ‘new’ money to generate $1 trillion of GDP growth since 2008, but has pushed up inflation to make its debts look rosier, but the rates of repayment are still outstripping inflation making the Governments borrow at higher and higher interest rates.

So what to do?  The IMF produced a paper in 2013 and offered 5 possible solutions:

1. Economic growth

2. Fiscal adjustment-austerity

3. Explicit (de jure) default or restructuring

4. Inflation surprise

5. A steady dose of financial repression accompanied by a steady dose of inflation

(1) has failed to happen as there are no efficiency gains to be had, and no new economic factors, (2) requires a politically suicidal contraction of the welfare state, (3) default would kill the banking sector worldwide stone dead, even if it is done by tapered debt-forgiveness, (4) is already underway and the rates of repayment are still outpacing it, and this leaves (5), ‘financial repression’.

What is that?  You may ask.  It is the IMF’s polite way of saying a seizure of private wealth.  And where could that take us?

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