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After a
long and lengthening political debacle on both sides of the Atlantic, the
developed world remains embedded in a crisis that the political systems are
unable, or unwilling, to resolve despite all the hopeful talks. The leaders
of the developed world are capable, competent men who have what it takes to
surmount the debt crises that are consuming confidence day by day. So why
don’t they?
Current Status
U.S.
Fitch
Ratings gave the United States until 2013 to come up with a "credible
plan" to tackle its ballooning budget deficit or risk a downgrade of the
country's coveted, AAA rating. The ratings agency revised the outlook from
stable to negative on the U.S. credit rating after a special congressional
committee failed last week to agree on at least $1.2 trillion in
deficit-reduction measures. The committee failure made it unlikely that any
meaningful deficit plan will be adopted next year, increasing the fiscal
burden on the next administration that will be elected in late 2012, Fitch
said. Fitch said the chance of a downgrade is "slightly greater than
50%".
With unemployment
still hovering close to 9.0%, it is likely that Federal Reserve policymakers
will consider further monetary stimulus in an effort to give growth some
support and to lower the risk of another US recession. While it may appear to
be capable of stimulating growth, it will decrease the value of the U.S.
dollar both internally and internationally.
Europe
The German bond
auction, last week, and Italy’s bond auction were poorly received with
Italian 2-year bond yields rising to 7.8% from 3.45%. The I.M.F. is not in
talks with Italy to provide financial assistance. It does not have the
resources to do so either. This week, Italy had to pay 8% for its loans.
Belgium’s credit rating by Standard and
Poor’s to AA from AA+. The Belgian government's capacity to prevent an
increase in general government debt, which we consider to be already at high
levels, is being constrained by rapid private sector deleveraging both in
Belgium and among many of Belgium's key trading partners
Standard & Poor's could change the outlook for
France's triple-A rating to negative within the next 10 days.
France's ratings outlook is currently stable with
S&P, but there have been rumors for months of a possible downgrade by one
or more of the ratings agencies.
Moody's said it could downgrade the subordinated
debt of 87 banks across 15 European Union nations on concerns that
governments would be too cash-strapped to bail out holders of riskier bank
debt in times of stress. Most of the ratings to be reviewed were in Spain,
Italy, Austria, and France. The review could lead to an average potential downgrade of
subordinated debt by two notches, and junior subordinated debt and Tier 3
debt by one notch. Moody's believes that systemic support for subordinated
debt in Europe is becoming ever more unpredictable due to a combination of
anticipated changes in policy and financial constraints. Nations affected by
review were listed as Austria (nine banks), Belgium (three), Cyprus (two),
Finland (three), France (seven), Italy (17), Luxembourg (three), Netherlands
(six), Norway (five), Poland (one), Portugal (two), Slovenia (two), Spain
(21), Sweden (four) and Switzerland (two). Moody's also warned that the risk
to ratings on subordinated debt could extend outside the borders of the
European Union.
Banks and ratings agencies are sounding their
loudest warnings –the euro area risks unraveling unless its guardians
quickly intensify efforts to beat the two-year sovereign debt crisis.
European finance chiefs prepare to meet this week, yet again, but hopes are
barely discernible. Moody’s Investors Service said today the
“rapid escalation” of the crisis threatens all of the
region’s sovereign ratings. Europe has accumulated too much public
debt. It is in deep disagreement about the way forward. Its banks are short
of capital and have difficulties funding. It has lost most of its internal
growth dynamic. And bond investors have lost trust, draining away in droves
and causing a liquidity crisis with the E.C.B. wishing to stick to its purity
and Germany sticking to its guns.
So far, all we have are deepening sovereign and bank
funding problems, governments being replaced, growth a lost dynamic, and
despair the general currency. So it isn’t too difficult to see a final
EU crisis moment approaching in which markets cause asset prices to collapse,
and there isn’t sufficient public support to keep things afloat (never
mind reform and regain market trust). And that moment, by all omens, may be
neigh. So 2012 could, for all in the developed world, be another 2008 or
1998, as an E.U. disruption.
Why Politicians Cannot Get the Job Done
With the
mental capacities, the power and control, why aren’t politicians
resolving financial crisis? This is an easy question to ask, but the answer
is far from simple. Take the concept of democracy. This is a structure
espoused as the answer to all ills, pushed forward by the developed world, in
particular. What is democracy in the context of today’s crises?
It’s
an institution that requires all people over a certain age (with very few
exceptions) to state their support for a very few, selected individuals
usually belonging to one of around three political parties to vote for one of
this small number of choices that they feel will carry out their wishes as
defined by the party’s manifesto. Parties decide their manifesto ahead
of elections that take place around five years at a time. Outside those
elections, individuals have little or no choice in politics. Therefore
politicians gear their actions to achieving the most popularity just ahead of
those dates. This allows unpopular actions to be taken early in the term of
elected politicians and for popularity to be garnered close to the elections.
So the extent of the individual choice is very limited and occasional.
But
something has gone very wrong with this system in the E.U. and the U.S.A.
currently. The result of elections in so many developed world nations has
left nations with such a fine balance of power on the political front that
governments are not able to govern effectively. In the U.S. the Republicans
and Democrats have managed to stalemate each other to the extent that they
can get little governing done on the budget deficit. So strong are party
politics, that the interests of the nation they govern have been sidelined. Party politics have transcended national
interests. The same is true in the Eurozone, where government
over-borrowing has been allowed against the European Union to which they
swore allegiance. Even in the midst of the worst crisis the E.U. has faced,
national politicians are failing to rise over national and party politics to
save the Eurozone from individual or collective insolvency.
As one
E.U. politician so aptly put it, “We know what to do, but the problem
is getting re-elected after we’ve done it”. So now we wait in
this limbo of indecision, with little prospect of change coming. When will
they act? Again democratic politics has a specific influence over their
actions. When a politician acts to resolve a problem that requires unpopular
measures, he rarely stays in power, victim of the unpopularity of voting
support. When voters feel the pain of those problems, their attitudes change.
Now their only hope is political action to remove that pain. Now unpopular
measures are acceptable to the electorate, desperate to feel relief. In fact
if these work, then the politician that imposes such measures is hailed a
hero in his land and is likely to be re-elected. We’re now waiting for
the pain to strike. You can be sure
it will strike before the next U.S. Presidential elections. The skill of the
President is to make sure the oppositions takes the blame. The skill of the
oppositions is to make sure the President takes the blame. Both hope the
electorates are gullible enough to support them and not to blame the system
that rules them and to push for a change of system.
Contrast
this with a system that believes it knows its people’s wishes better
than they do themselves, such as China. There the rule of government is
almost complete, allowing them to manage the economy and monetary system
without oppositions and with only muted criticism. A look at the economy of
the two tells its own tale. Nevertheless citizens in China place their trust
is savings and in particular gold, not the government systems.
Why Gold Will Benefit From Political Impasse
With
political considerations set far above financial ones, only the explosion of
confidence in national money will swing political considerations behind
financial ones. This seems and easy answer, but it isn’t. The ailments
of the financial system extend to its very structure: the banking system. The
longer it takes to resolve the financial crises, the worse it gets. Once the
decay in confidence has past a certain point,
it’s impossible to fix. Then there needs to be a restructuring of the
system. The worse the level of confidence, the more radical the
re-structuring needs to be. The more re-structuring there needs to be, the
stronger the hold of government over its nation needs to be. That means there
will need to be an overwhelming dominance of one party or another so as to
avoid the current developed world impasses. To date, the performance of
developed world political parties falls short of inspiring such support.
So what does an investor do?
In the
developed world he can hop from one investment to another in the hope he has
found some special formula that will save his wealth. Once this fails he may
turn to another. For instance he may turn to U.S. Treasuries as the ultimate
of liquid markets or cash (at the short end). But Treasury prices at all end
of the Yield Curve have never been so high, so capital appreciation is not
expected. Yield increases would mean falling prices and losses if one bought
now. But this is the tree trunk of the fictional currency system, so
there’s nowhere else to turn.
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