The Futility Monster

He'll pointlessly derive more enjoyment out of your resources than you

The World Economy Stares Into The Abyss. Again.

Posted by The Futility Monster on February 13, 2010 @ 09:46

Not quite sure how much more we can put onto these...

It’s a shame to once again be talking about the dangers facing the economic future of the planet again, but there is something extremely unsettling about what’s going on at the moment.

Recession has ended across the planet, thanks largely to unprecedented fiscal expansions across the globe. Deficit spending has saved us from serious meltdown; but it was combined with extraordinary levels of intervention to nationalise vast waves of the banking sector, which are now entirely dependent on the government.

The problem is that, in the background, the private sector is still terribly nervous about prospects. They’re starting to realise that governments – while they may be the lender of last resort, and will do all they can to ensure their own economies avoid the worst – do not have infinite reserves of cash.

And so attention has turned to Europe, particularly Greece, Spain, Portugal, Ireland, Italy and, yes, the UK.

Our levels of debt are already high, and the projected borrowing into future years just keeps on going. In many countries, it will be ages before budgets are balanced again.

The banks, already being propped up by vast levels of government support, are starting to worry about the solvency of the very governments that have got them through these perilous times. They’re beginning to panic: if the governments default, are we not all back in the shitter again?

The answer is obvious.

The more realistic question though is will it happen?

It seems extraordinarily unlikely that a sovereign nation would be allowed to default these days. Certainly not within the EU, when the treaties suggest that fellow member states have an obligation to help them out. But we all know these treaties can be ignored. And, let’s face it, if 26 member states decide to leave the other one out in the cold, there’s going to be little the isolated member can do.

But therein lies the problem. It’s not just one state. It’s six. You could conceive of a situation where the EU lets one of its members default on its debt, particularly a smaller one. But when there are six, one default will spook the markets to such an extent that the other five will become toxic, and Britain would get junk status quicker than you can say Morgan Stanley Dean Witter card.

This is yet another defining moment in the history of the world economy. If the EU bails out Greece, the begging bowl will soon get passed around, and years of “moral hazard” preaching go down the toilet. If the EU doesn’t bail out Greece, the repercussions will be just as severe.

I’ve said it before, and I’ll say it again, this really isn’t a good election to win…

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