— aleatory

Debt Disconnect

The Debt Drug

On Friday I questioned the validity of relying on a single, relatively unreliable and untested measure as a leading indicator. At the risk of sounding like an economist that is not to say I disagree with the conclusions made.

Indeed watching the UK consumers’ response to their emergency ‘austerity’ budget may be a useful predictor for the likely US retrenchment, whenever Obama decides (or more likely, is forced) to follow suit.

Though rather than being a function of the consumer, there is a case to be made that the next major index movement will come from a government’s inability to pay it’s bills and hence stopping the stimulus-led consumer ‘growth’ story in it’s tracks.

Debt Induced Recession

First off is an article from Sunday’s Telegraph that points out the cost of hedging against Greek default is more expensive now than at any time since the current crisis began. And that’s with massive European intervention.

Then there is the US itself, where in California alone spending must be reduced by a sum greater than Greece, Portugal, Ireland, Hungary, and Romania combined. 45 other US states have budget deficits to cut by this time next year. Obama at the surprisingly low key G20 summit appeared to bow to pressure from other world leaders to move to cut budget deficits by half inside 3 years.

Does anyone really believe this will happen?

Gross American debt is predicted (by the government) to hit 100% of GDP by 2011 – over 15 trillion dollars. The painful fiscal tightening that any attempt to reduce this – no matter how hollow – will when taken with similar tax objectives from individual states, likely precipitate a substantial fall off in GDP growth. Hastening such a scenario is the ending of the existing Bush-era stimuli such as extended benefits in July. Housing has already been shown to have retrenched following the New Home Sales tax credit scheme shutting down.

Lack of demand points to deflation and this points to more expensive debt servicing and a final slip from recession into acknowledged depression. But the longer Quantitative Easing is pursued, the longer the money is printed, the bigger this final reckoning will become. Ultimately the Fed’s unwillingness to accept the Business Cycle is the chief obstacle in this war against the inevitable.

But all the signs are there that the market thinks we’re closer to that tipping point than is currently being reported.

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