The world economy: fasten your seat belts.....

The world economy will remain in deep poo throughout the whole of 2012, but to varying degrees. The US will be up to its ocksters, but there are already some green shoots. Growth is predicted at 2.4% which in the UK would have the Tory press crying ‘Booming Britain’. Unemployment will continue at a high of around 8%; unemployment usually only starts to fall after the recovery has been going for about 5 years. The housing market will remain in the doldrums. The American people will drag themselves out of the mess despite the best efforts of the political class. The markets are beginning to short Obama, but as yet there is no inkling as to which of the Republican candidates will put O back in the White House.

The UK will continue to struggle upwards, with two great economic and morale boosters – the Olympic Games and the 60^th anniversary of the reign of Her Maj. It is fortunate that Treasury gilts are mostly long-dated stock averaging about 14 years. If we are not out of the merde by then I don’t think it will worry me too much.

The Eurozone looks like a basket-case. None of the leaders has a clue as to what they can do that would be politically acceptable to their people. None of the proposed solutions is viable. The case for ‘ever more union’ is dead. There seems to be no alternative to the departure of the Greeks followed by default. The Brussels nomenklatura treat this prospect as the equivalent to the end of the world. It isn’t. Both Argentina and Russia defaulted in recent times but they are still there and doing quite nicely, thank you. But they still can’t reconcile themselves to the kindergarten logic that a ‘one size fits all’ actually means ‘one size fits nobody’. The Euro will continue because the fall-out of a break-up would be devastating throughout the world, but it will be much changed

Now it looks as if Hungary will be the latest sick man of Europe with the total failure of its latest bond auction when the rate came in at an impossible 10.5%

As far as the emerging markets are concerned, the days of explosive growth are over, as consumer demand, especially from America, falls off. This will have a depressive effect on the major commodity-producers, such as Australia and South Africa. There are worrying signs that the shine may be coming off Indonesia not only as a low-cost low-skill economy but also due to increasing labour unrest.

So what to do?

Well, a good starting point might be to accurately identify the problem that all countries have spectacularly failed to do.

They say that the root of the problem is the contraction of credit, the shortage of funds for new and expanding business, bad debts, bad banks, mortgage repossessions and rising unemployment.

But these are the symptoms, not the cause. If it were otherwise, the hedge funds and venture capitalists would be having a field-day, snapping up bargains. They are not. In fact they have been rather quiescent.

The real reason is that the culture of greed that has characterised the past 30 years, the lies and deceit of the political and business classes, and the loss of basic commercial and political integrity have totally perverted the information systems on which the whole of capitalism depends.

It is now exceedingly difficult to make sound judgements on the information essential to the granting of credit - reliable information on the ownership of assets and liabilities, and the risks – because the systems themselves have been debauched.

Balance sheets are no longer a reliable guide to the state of the business. Off-balance sheet accounting allows adverse data to be parked in Special Purpose Instruments (SPEs), hidden from enquiry.

The bundling and slicing of US mortgages means that it is now difficult to identify the true owners of no less than 60%, so the asset can’t be realised to help pay off the debt and the banks to clear their books. The amount of these ‘derivatives’ is estimated to be 40 times the US GDP!

So you can’t make a judgement on extending or granting a loan if the balance sheet is less than truthful. You can’t determine the solvency of a bank if you can’t discover what toxic assets they are holding or you can’t find the legal owner of a mortgage.

Governments have been to the fore in concealing their true indebtedness. Greece, Italy and others regularly borrowed on the repo market, short term loans that go unreported and distort true indebtedness. Our very own Gordon Brown ensured that almost every new hospital, school and public building was financed by the PFI – the Private Finance Initiative whereby these works are financed by the developer. This keeps the capital cost off the balance sheet but is still public debt, so the true level of Britain’s indebtedness is probably frighteningly higher than shown in the books.

It’s not a fiscal problem.

It’s ‘truth’ problem!