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Wednesday, 10 March 2010

Something from Winston - and why the recovery is a chimera

"Democracy is the worst possible form of government - except for all the others," said Churchill.

To gain and retain power in a democracy politicians tell people what they want to hear, not the truth, and give them what they want, not what is good for them.

That is one reason why we're in a mess, and this, by Bill Bonner in The Daily Reckoning shows why things are unlikely to improve. It's about the U.S. economy, but applies to the U.K., Italy, Greece and God knows where else.

"The US is insolvent," says a report from a hedge fund. As of the third quarter of last year, the federal government had assets of $2.67 trillion and total liabilities of $14.12 trillion.

That leaves a net negative position of more than $11 trillion. By the way, this is projected to get a lot worse, fast. The feds are expected to increase their debts by about $3 trillion more over the next 2 years. Federal spending is out of control...the feds have lost control of their own budget, let alone the economy.

Typically lenders look for what they call 'debt coverage' - debt compared to revenue. If you take the US revenue as a whole, you find federal debt currently equal to a bit more than 80% of GDP. But that number is going up quickly. It will be over one hundred percent in just 2 or 3 years.

Well, so what? As long as you have the income to support it, you don't worry, right? Well, let's look at it from that angle.

Hmmm... Doesn't look so good from that perspective either. The income tax only generates 43% of the budget. The feds get a little more from corporate and other taxes, but the deficit is enormous...from a third to a half of all expenditures.

This is not looking good. Most of the deficits do not come as emergency reactions to a financial crisis. Most of red ink is 'structural' - the result of programs already in place before the crisis hit. They are hard to curtail, since it requires major acts of political will to undo them. So, they tend to continue.

Which means, the US needs to borrow huge amounts of money just to continue drifting along in the style to which it has become accustomed. There is no end in sight to the deficits...no practical way to reduce them...and no way out of the debt whirlpool. Which means, financing them has got to be a losing proposition for the lenders.

Nothing new in that...

Still, we drift...we wander...we float from one bank to the other...and wonder when we will finally sink.

The £ fell because our figures don't make sense; but none of the parties is proposing nasty medicine.

The following makes sense to me. How about you?

1. Every thinking person knows in their personal life that when things get tough they have to cut back and make the best of what they have rathert than run up more debt.

2. The people who vote tend to think a little more than those who don't.

It will not be too hard for them to understand that if the economy is in the toilet promises that, for example, the National Health Service will not be affected, are silly.

And it will not be hard for them to understand that this need not mean the end of the world. It will probably need sensible thinking about how you use limited resources.

As William Rutherford remarked when addressing his colleagues at the Cavendish Laboratory : "We have no money. Therefore we must think."

But if you spend your time watching the polls, concocting lies and dreaming up silly, catch-camera wheezes, thinking doesn't get much of a look-in.

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