Thursday, May 24, 2012

The Greater Depression

It is with a horrified fascination that I watch the current political events in Europe unfold. The people of France and Greece, in particular, after years of enjoying profligate government spending, have decided to throw caution (and the tentative efforts by their previous governments at reining in the excesses) to the wind. They don't want to hear that they have been living beyond their means and can't see why they should stop enjoying the benefits of a lifestyle that they feel entitled to but can't afford. The new president of France, Fran├žois Hollande, wants the EU to adopt a new form of borrowing called Eurobonds. The German chancellor, Angela Merkel, is vehemently opposed to these new financial instruments and it is not difficult to see why. They are a liability that is incurred by an individual country but for which the repayment obligation is shared by all EU nations. As there is only one EU nation that remains at the highest level of creditworthiness, i.e. Germany, Angela Merkel and German taxpayers know exactly who ultimately will pick up the tab.

I have been saying for quite some time that the world is already in what some commentators are starting to call the Greater Depression*. We are following the exact same trajectory as the world followed in the 1930s - that is, an initial financial sector crisis followed by signs of recovery, followed by the deepest and longest economic downturn the world had ever seen. We had the banking sector problems starting in 2008, followed by signs of a recovery as governments have tried to spend their way out of the problem, and clear evidence now that it is not working and that a deeper recession is coming. I think the term Greater Depression will precisely describe what the world is about to endure. Like the 1930s, I predict it will be 10 to 15 years before we recover from the current economic malaise.

The reason I am so certain about this is because nothing is changing. There is no political will to address years of overspending by governments all around the world. It has already been proved over the last four years that the current economic crisis is not something that can be addressed by governments borrowing more money, printing more money, and spending more money.

No one will be immune from the crisis. The biggest casualties of all will be the United States and Japan, the two most heavily indebted countries in the world. The US, at least, can continue to service its debt for a few more years, even at current rates of growth. Japan's government is spending twice what it takes in tax revenues and the situation is getting worse every year. Even China, the world's great creditor economy, is now showing signs that its period of massive growth is over. China will suffer more than most as its export revenues dry up and its debtors default on their repayments. With Europe, North America and East Asia all hitting the wall at about the same time, no one will have the means to spend their way out of trouble. There will be a massive correction, with government spending and tax funded benefits being adjusted downwards by up to 50% all around the world, whether voters like it or not. This is what happened in the Great Depression and it is what is going to happen in the Greater Depression. I, like many sensible financial commentators around the world, believe it cannot be avoided, especially with voters only too ready to accept the fraudulent assurances of leaders like Fran├žois Hollande.

What to do about it at a personal level? Protecting your wealth should be your focus. Seek investment safe havens like gold and countercyclical opportunities like shorting treasury bonds. Pay off all your debt as soon as you can and hunker down for the stormy times ahead.

* From Doug Casey of Casey Research via Not PC.

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