Descent into the Maelstrom

“Harry Clarke 1919, illustration for Edgar Allan Poe’s Descent into the Maelstrom”Maelstrom-Clarke.jpg

We have forces tugging at every angle, with every angle, it would appear, ready to disappear into the enveloping abyss. 

A consumer debt crisis that impacted the financial system via the implosion of an asset focussed explosion in broad money supply growth started it all off.   But this was a vast and global event, interconnected in many ways, that had developed over decades, and so it has proved too big a pill to swallow and shrug off.

The crisis has since transformed into a sovereign debt crisis (governments have borrowed to bail out banks, support industry and consumer demand via fiscal stimulus), which for the moment has its center over the Euro zone, but is just as likely to move East to Japan and Asia as it is to the West and North America.   It is over the Eurozone because for the moment the Eurozone is unable to artificially support the prices of this debt, resulting in austerity and risk of default, and hastening its return to the heart of financial stability (the governments and the banks).  It has no defense against reality.

We have stories of European banks no longer able to borrow and hence no longer able to lend, of banks that are technically insolvent, of key economies slowly weakening, of weak economies collapsing, of the whole drifting deeper into the mire, the maelstrom that threatens.   It could not be any worse, as Europe is half in the maelstrom already, requiring no further weakness, only inertia to the do the rest.   Yet, we know that Europe is set for austerity and in the absence of a remarkable turnaround in domestic and foreign demand, this austerity could lead to depression.

We have news of weakness in China and concern over its own not insignificant debt issues and structural imbalances (over dependent on debt financed gross fixed capital formation), India and Brazil: these are three key economies with vast populations that were ultimately meant to support and drive growth forward.  Yet, for the moment, the risks are that these three are failing the cause at precisely the worst possible time; not that it was ever conceivable that they could have provided the necessary demand to revive the west in the time available.

We also have a mild resurgence in US economic growth, a resurgence built on dissaving, government debt, higher inventories and an expansion in non revolving consumer credit.  The thought that strives to live is; “can the US survive and grow and by virtue of this save the day?”.   The headwinds are strong, notwithstanding the Euro crisis:

  • The US government owes more money relative to its GDP than the average European government, as does the US consumer;
  • While Europe in degrees could benefit from greater consumption relative to production, the US very much needs to reduce consumption and produce more, which means, with high consumer debt and government cutbacks around the corner, it needs to export more.  
  • Can the US hold the world on its shoulders while it is wounded and weak itself, and itself at risk of austerity.  

The whole edifice, appears to be just that, an edifice.   There are far too many things happening and no longer enough firepower to keep it real, but more than enough to lose the plot entirely.

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