Putting the toothpaste back in the tube……….


Growth fuelled by borrowing is at an end. Massive debt-financed binges that held sway in the USA and Europe led to the banks offering new and evermore high risk loans to those who knew no better – those who were caught up in the binge culture. The banks were not allowed to fail (except for Lehmans) and now nations that bailed them out are paying the price – not Governments, but taxpayers and workers throughout Greece, Spain, Italy, Portugal, USA, UK, Ireland where Government spending is heading down, taxes are headed up and growth (as measured by GDP) is slowing and may well reverse.

The Euro crisis is a manifestation of the disease – a genetic disorder that was bound to show itself once the patient came back to earth. It is now showing all the symptoms of a patient that has been in denial and is only gradually coming out of therapy.

Not many saw this coming but some extraordinary thinkers on finance and the economy did. I do not refer just to Roubini or  Taleb who have garnered so much publicity. I rely greatly on the writing of two Americans – A. Gary Shilling and John Mauldin – whose books appeared after the banking crisis but who were both forecasting the problem well before.
Gary Shilling’s “The Age of Deleveraging” (http://www.amazon.co.uk/Age-Deleveraging-Investment-Strategies-Deflation/dp/111815018X/ref=sr_1_1?s=books&ie=UTF8&qid=1325520758&sr=1-1) and

John Mauldin’s “Endgame” (http://www.amazon.co.uk/End-Game-SuperCycle-Changes-Everything/dp/1118004574/ref=sr_1_1?s=books&ie=UTF8&qid=1325520845&sr=1-1)

should be required reading by anyone that wants to understand how the toothpaste got out of the tube and why it won’t go back in. Deleveraging (really the theme of both books) is about reducing our dependence on loans – from individuals to intermediaries like banks and then to governments. This triad of over-extended lending (which is actually worsening) is not allowing itself to be cured.

Most economists did not correctly judge the problems or see ahead the solutions that were needed. Equilibrium based economics working within the norms of “binomial distribution” (normal ranges of events) never see the dramatic risks that can build up in economies while politicians never see beyond the next election. We are all geared to a simulation of the real world in a quasi-science that is not working. As one of Michelle Houellebecq’s characters said in his recently written “The Map and the Territory”: “the economy was linked to almost nothing, except to what was most machine-like, predictable and mechanical in the human being. Not only was it not a science but it wasn’t an art. It was…almost nothing at all.”

Economics and its story of the real world needs to re-invent itself. Politics need to drive this need – not the 1p in the £ tax break or short-termism that covers all thinking today. Democracy is in danger itself (who is running Italy but unelected administrators) unless we are able to urgently re-establish a link between the way we are governed, what we believe to be important in our lives and what we use to help us make decisions.

Please read Shilling and Mauldin – not everyone will agree with everything they say but the thoughtful analysis and insight they provide in a world of people who really do not understand anything they are talking about (which includes many so-called financial experts) is crucial.

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