Solutions to Europe’s On-going Debt Crisis

Austerity as we know it is out, meanwhile austerity-via-stealth-inflation, or financial repression, is in, writes Clem Chambers, of the solutions to Europe’s on-going sovereign debt crisis. Clem is a global markets commentator, CEO of ADVFN.com and author of investment titles and novels. (www. clemchambers.com)

As a solution to the current economic crisis, ‘austerity’ is now most definitely out of favour.

Apparently, what is needed instead is ‘growth’. Growth is not a bad thing. However, unlike austerity, growth cannot be implemented by government.

If austerity is based on a structured program, then growth is based on barely more than a wish and a prayer.

Future years spent on ‘the austerity program’ will mean the very same people that got us into this mess will likely get thrown out of their jobs - austerity gets politicians fired; bureaucrats laid off. It cuts the budgets of those in the wealth redistribution sector.

And turkeys don’t vote for Christmas.

Alternatively, how exactly are we going to magic up growth? Interest rates can hardly be made any lower. Are consumers meant to take on more debt and go on a spending spree? Where is this ‘growth’ coming from?

~ Which could lead one to ask, ‘where did the previous growth come from?’

The answer is a lot of it came from public sector growth and the creation of credit and money supply through property booms.

Take this away and you won’t find much growth in the US and Europe.

These old, growth drivers are dead. The property bubble is over and the public sector can’t fund itself.

Growth must therefore come from the private sector; real growth always does.

~ So what are the chances for the private sector?

Firstly, much of the large enterprise powering Western economies is heavily indebted. There is said to be over US$45 trillion dollars of debt that needs to be rolled over during the next four years, for example. This makes Greece’s funding problems shrink in comparison.

However, business is resilient. Its diversity is a strength.

Ten trillion a year is a lot of money however; this cash will need to be in the system to lend.

In effect, there will need to be lots of liquidity in global markets to keep the private sector afloat, let alone thriving. As such, ‘government’ will have to work hard to keep the private sector alive before it can address the creation of growth.

It will have to do this via all kinds of Quantatative Easting (QE).

~Yet the real key to growth is… austerity!

Public and private sector both have equilibriums. Too higher proportion of either can be a bad thing. North Korea - where everything and everyone is in the public sector - isn’t a good place to live . Conversely, neither is a place like Puntland, Somalia, where anarchy reigns.

The optimal balance is somewhere in between.

Right now, the public sectors of the West are too big. Consequentially, they have gone broke. Less public sector and more private sector is what is needed.

To create this, you have to cut back on government and regulation and let the chaotic forces of ‘laissez faire’ have more space. Some of the formal gardens of central planning have to be turned back to nature.

Once again, just as ‘Turkeys don’t vote for Christmas’, this is unlikely to happen - only the bravest countries will take this route.

What is likely instead is an economic clamp-down. This clamp-down will be an effort by the public sector to extract more money from the private sector to fund their costs. The golden goose will get plucked, too. This, of course, will hurt further hurt growth.

With no growth and no austerity there remains one solution: financial repression. That’s not an emotive phrase, by the way, it’s an economic technique.

~ You will recognise financial repression.

A country keeps its base interest rate low. The government creates a banking environment where it forces the economy to lend to it, because there a few other options. It controls domestic banking to enforce the reality that government debt is the only saving mechanism and it requires banks to hold large reserves in government debt. The gap of interest rates below inflation causes the savings value to be transferred from the lender to the borrower. This technique is good for 2-5% of GDP a year. In the past, it has been worth up to 20% of tax revenue for countries like Mexico and India.

It’s a stealth way of soaking the populace for money that can’t be taxed upfront.

Once again, the solution of the public sector is driven by inflation.

~Without some sort of austerity there can be no real growth.

And without real growth, the debts can’t be repaid in real money. The solution is to repay in ‘funny money.’ Without shrinking the public sector, which is after all, the core plank of austerity, the only way out is to devalue money.

The public sector tells us there is low inflation in most of the West, but this is an illusion. If you look into an electronics store, you won’t notice rising prices yet if you check your groceries you will see plenty. There is plenty of inflation if you measure the things they tracked in the 1970s when inflation ran riot.

My point is not to rail against inflation or put forwards alternate solutions. It’s just to point out that inflation is the key thing an investor in today’s market needs to guard and hedge against.

Until the public sectors have rebalanced their overheads and debts, the spectre and reality of inflation will remain.

Meanwhile the misery of recession will go on.

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