As
the health of much of the global economy weakens on a daily basis, political
leadership increasingly ignores the source of the malady and instead focuses
on short term "band-aid" remedies. These measures which may buy a
few months, or years, of relative well being, will convince the public that
problems have been solved and will thereby take pressure off governments to
make the needed structural changes.
The
recently announced $1 trillion EU bailout is a perfect example of this
"band-aid" approach. The just concluded general election in the
United Kingdom is another. The inconclusive UK result, which creates a
Conservative/Liberal Democrat coalition, will be an unhappy, unquestionably
temporary arrangement. Similarly, the EU bailout will continue to infuriate
Northern Europeans, who may ultimately push for a breakup of the Union.
NuLabour
(what the center-drifting Labour Party of Tony Blair has been branded) took a
spectacular beating as a result of the clumsy stewardship of now former Prime
Minister, Gordon Brown. Mr. Brown, whom I knew as a political bruiser in his
early days in the House of Commons, had led Britain far down the road to
economic ruin. As a very powerful Chancellor of the Exchequer under Tony
Blair, he introduced many stealth taxes to finance a wave of high government
spending. Seemingly operating as an unelected Prime Minister, he unleashed
massive spending programs and interfered with UK banks in ways that worsened
the effects of the financial crisis.
After
Brown formally succeeded Blair in June of 2007, he soon became one of the
most unpopular Prime Ministers in more than a century. The fact that David
Cameron and the Conservatives were unable to capitalize on this weakness to
secure a massive victory must be seen as a major failure.
Furthermore,
Cameron was so anxious for personal power that he accepted a power sharing
arrangement with the Liberal Democrats, a party with many key views to the
left of NuLabour. This will lead to damaging compromises that, over time,
will likely threaten both his parliamentary and grass roots support. Indeed
cracks already are showing in the Conservative ranks.
The
fragile coalition likely will have little appetite for the tough economic
decisions that need to be made, including the adoption of austerity measures
that must surely accompany any meaningful attempt to curb the unhealthy
deficit. This political paralysis will leave the UK increasingly exposed to
default and economically ruinous inflation. Those deemed to be responsible
for any continued economic weakness will likely to be voted out in the next
election, which could come as soon as 12 months. Labour's status as the
opposition party may be brief.
In
short, personal ambition has driven Cameron to fall into a major political
trap. He would have been well advised to shun a coalition and leave the
political costs of acute austerity and abject poverty to a NuLabour/Liberal
Democrat coalition who would be cast out at the next election, leaving a much
stronger and unencumbered Conservative Party in power for years to come.
The
massive EU/ IMF band-aid to insulate default contagion will likely share a
similar fate. The move, which will prevent the needed restructuring of the
EU's "Club Med" countries, will destroy the Euro and unleash
massive inflation. The furious spike in gold prices in the days after the EU
capitulation indicates the depth and breadth of this consensus. Worse yet, in
exchange for sowing the seeds for disunion, the bailout will achieve nothing
significant.
The
package may well insulate Greece from market default for some 18 months, but
it will do little to change Greek habits. Even at almost a trillion dollars,
it will prove insufficient to meet the likely cumulative needs of Portugal,
Spain, Italy, Ireland, France and the UK.
Furthermore,
despite their leaders' willingness to protect the Club Med and the cohesion
of the EU, the German population is increasingly angry. Indeed, as a result
of her support for the Greek bailout, Chancellor Merkel suffered a serious
electoral setback on May 9th.
In
short both the UK conservatives and the EU appear to have been so tempted by
achieving or retaining political power within their failed economic models
that they have fallen into electoral traps that likely will threaten their
political survival within the coming year. They may have bought themselves
some time, but little else.
John
Browne
Senior Market Strategist
Euro
Pacific Capital, Inc.
20271
Acacia Street, #200 Newport Beach, CA 92660
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888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
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John Browne is the
Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a distinguished
former member of Britain's Parliament who served on the Treasury Select
Committee, as Chairman of the Conservative Small Business Committee, and as a
close associate of then-Prime Minister Margaret Thatcher. Among his many
notable assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the first to
convince Thatcher of the growing stature of then Agriculture Minister Mikhail
Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business
with." A graduate of the Royal Military Academy Sandhurst, Britain's
version of West Point and retired British army major, John served as a pilot,
parachutist, and communications specialist in the elite Grenadiers of the
Royal Guard.
In addition to careers
in British politics and the military, John has a significant background,
spanning some 37 years, in finance and business. After graduating from the
Harvard Business School, John joined the New York firm of Morgan Stanley
& Co as an investment banker. He has also worked with such firms as
Barclays Bank and Citigroup. During his career he has served on the boards of
numerous banks and international corporations, with a special interest in
venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the
former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.
Copyright © 2008
Euro Pacific
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