The assumption that the developed world is not threatened by popular outbursts is a façade – and one that will be blown away before long.
By PINCHAS LANDAU
Perhaps the simplest way of addressing the current seemingly confused state of the global economy is to regard the entire construct as a façade, an exercise in make believe. Certainly anyone listening to the speeches and ‘testimony’ of Fed chairman Ben Bernanke in various congressional appearances over the last couple of weeks, or for that matter, anyone listening to ECB President Jean-Claude Trichet, would be pushed toward the conclusion that they are engaged in a mega-Purim spiel. As for the line being pushed by President Obama and his entourage, that is vying with Gaddafi’s hallucinations for the least-credible-spin award.Bernanke wants members of Congress, the American public and ultimately the whole world to believe that: a) the American economy is gathering strength and this improvement is the result of his hugely and unprecedentedly lax monetary policy; b) however, the dramatic rises in prices of many commodities and raw materials, including oil, grains, precious and base metals, is not in any ] connected with his policies and their impact on global demand, global flows of capital and the behavior of investors. Down the road, in the White House and at the Treasury Department, the pretense is that the enormous accumulation of debt by the federal government, stemming from annual deficits for the last three years in the order of 10 percent of the GDP (in money terms, we’re talking about $1.5 trillion or more, for the current fiscal year), is ‘creating jobs’ and spurring economic recovery. However, it is not creating inflation, nor is it a source of long-term concern, because it can and will be trimmed back starting as soon as, er, not just yet.Across the pond, Trichet is virtually promising to raise interest rates in the euro zone as soon as next month – as discussed here last week. His rationale is the polar opposite of Bernanke’s, because he and the institution he heads are fixated by any inflationary threat and tend to react accordingly. However, if he were to deliver on this threat/promise, he would do as much damage to the European economy as Bernanke is doing to the American one, but in symmetrically opposite ways. While Bernanke is devaluing the dollar, Trichet is revaluing the euro, which will hurt the single growth sector still functioning in the European economy, namely the German-manufacturing exports machine.Similarly, while Bernanke is trying (totally unsuccessfully) to push long-term interest rates down so as to breathe life into the moribund housing sector, Trichet’s interest rate hike will land a hefty blow on Spanish mortgagees and other borrowers in the European periphery, notably Greece, Ireland and Portugal.Spain’s housing crisis is on a par with that of the US (although less horrendous than that of Ireland), and with high unemployment and zero-to-negative growth, rising interest rates is the least useful or desirable thing that borrowers need.Their problems will be rolled onto their lenders, i.e. Spanish banks, and from them back to the ECB, or to the Spanish government and then to the EU and from there to the ECB.It is therefore apparent, even to eight-year-old dunces, that Trichet is either bluffing or deluded.There is, unfortunately, no evidence to support the idea that he is bluffing, so we are left with the other option. In that, too, the two central bank heads are very similar – it looks very much as though they are living in a state of self-induced delusion.“What have they been smoking” is how this is elegantly phrased in the current slang.WHEN IT IS so blatantly obvious that TPTB (the powers that be, in blogosphere shorthand) are increasingly detached from reality, the level of nervousness among the general public increases. This may express itself in different ways, such as the huge demand for gold and silver, as perceived ‘stores of value’ that are not subject to the whims of governments and central bankers (or so most of the buyers believe). Alternatively, given the widespread expectations of inflation and, indeed, the growing evidence of it in many financial markets, some people – self-styled ‘investors’ – indulge in financial speculation, sure that when the inevitable end comes to the speculative binge, they will be able to exit in good time.
But most people are not merely sophisticated, they are not even investors. They are just consumers and – if they are lucky – wage-earners. They are as worried as the smart guys, but less able to articulate their angst, let alone protect themselves financially. They are pretty sure that the policies being followed by their leaders are bad – at least for them, probably for everyone.Most of the time they are too busy surviving the day, week and month to think about doing anything.But at some point an event, often minor or incidental, triggers a disproportionate reaction. That’s what happened in Tunisia and the wave of repressed anger and frustration that began there is still developing across the Arab world. The assumption is that the developed world is not threatened by similar popular outbursts, led by masses of disaffected, unemployed youths who have lost hope in both the future and the present. That is also a façade – and one that will be blown away before long.