Tuesday, January 27, 2009

Cassandra's crossing ...

Many years ago, I was predicting trouble in our economic system due to the excessive debt burden, the overheated housing boom and the actions of the OTC market. I'm no Cassandra, as my predictions were wrong.

I expected this to happen before 2005 and yet somehow we managed to continue sinking into more debt. I couldn't understand how we muddled along, I was perplexed by our constant assumption of a soft landing. I was still wrong.

The point about prediction is you need to be right about what happens and when it happens. Any fool can predict that eventually time will catch up with our own folly.

However, by all accounts we're about to embark on a new folly called quantitative easing. The use of such a quasi-scientific term is meant to give us reassurance for what is the fiscal equivalent of printing more money. Fortunately, we're told that this money won't be used to buy bad debts (yet) as we'll be busy underwriting the more media friendly euphemism of toxic assets.

Toxic assets are the financial sector's equivalent of friendly fire. Spinning bad news doesn't mean it goes away.

Unfortunately there is likely to be trillions in more bad debts which have yet to flush through the system. As the former masters of the universe know, this is a black hole that the government could continue to shovel money into. I'd rather us avoid the old adage of "In for a penny, then in for a pound".

Whilst the big easing (as I like to call it) will fare little better than the bail-outs, it should not result in the same waste on bankers bonuses, hoarding and buying jet planes. Instead the big easing will create a relatively short lived increase in share prices, probably benefiting those with deferred share option bonuses along with penalisation of savers through low interest rates. Oh damn, bigger bankers bonus, more inequality and more tension.

However, this unnecessary exposure (the major banks are already well capitalised) will also impair our ability to adapt and manage the hardships that many will experience in the coming years. People will become angry, desperate and disenfranchised.

This brings me to the title of this piece. Having learned the lesson of before, I'll make a cowardly custard prediction containing an element of sense with added vagueness and definitely no timeline. I predict that the slow march to the Rubicon has already begun, we would be wise to turn around soon.