Malcolm Blair Robinson
June 14, 2010 By Malcolm Blair-Robinson

Another Black Wednesday?

Apparently an alarming number of investors are betting upon a market crash, as nervousness about the state of the sovereign debts mount.

A  global financial crisis brought on by the banks being silly has been convenient to everyone, as a simple thread of explanation for the economic disaster, politicians especially. It is now beginning to look as confused as asserting that the iceberg hit the Titanic, rather than the other way around.

Everywhere the evidence mounts that this was and remains a global debt crisis. Banks are caught up in it and were responsible for the initial impact with their toxic assets and their gambling business model, but it is governments and their populations, all of us, who are really in trouble, because we are at the root of the cause.

We began to believe and we told each other that it was possible to have a living standard based not upon earnings but on a credit score. Not only did individuals live above their means on borrowed money, but governments and nations did also. At the heart of the plan was the delusion that continuing rises in the value of assets, whether houses or shares or whatever, could be engineered by demand alone and not by actual expansion of wealth creating capacity. In other words making money became confused with making wealth.

Now we have wound up with an entire economic structure which is flawed and creaking. Governments have borrowed so much there is no certainty that they can all repay what they owe, or that their populations will tolerate the shock decline in living standards needed to make that possible. If one defaults there is a new banking crisis. British domiciled banks are exposed to over £150 billion in Ireland alone. The mind boggles.

Not only have house prices risen way above true value financed by debt, but shares are consistently over valued also. Witness the astounding disclosure that BP’s dividend is 17% of the income of the UK pensions industry, and 12% of the FTSE 100.  This is not the fault of BP. It is the fact that fund managers have, since big bang, been engaged on growth not income and have sold capital to make up income shortfalls to disguise lack of earnings. Put another way they have forced up the price of shares so high that the dividends paid on the popular shares are at a tiny percentage of this inflated market price. Market price will depend on demand, but traditionally was a balance of shrewd investment for the long haul and speculation for vibrancy and competitiveness. Now it is tipped excessively towards speculation.

Just as the banks went bust, but were rescued before we knew it, because their ridiculous parcelled debt packages were not worth anything in a collapsed market, so the banks will face ruin again if excessive exposure to dodgy sovereign debt which defaults, has been their business model. Meanwhile there are prophesies of a new housing slump and another Black Wednesday. Doomsday may not come, but if we escape, it will be only just.

This is why all members of the coalition government are hell bent on cutting, no matter what they said before. They have not said it yet but a double dip recession brought on by re-modeling our economy so that the sums balance, shifting at least twenty five per cent of GDP away from the state back to the private sector, ensuring more of what we buy is British made paid for with our own money, may well be a price worth paying to avoid economic collapse.

The idea that we can borrow our way out of this is well and truly dead. The reason for that is that what we had before was an illusion. The only reality is what we owe. Unless we deal with that debt there can be no lasting recovery. Only another illusion.

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