Is the Bankruptcy of the US and the UK Unavoidable?

German philosopher Arthur Schopenhauer once said that “all truth goes through three stages. First it is ridiculed, then it encounters strong opposition and finally it is considered to have always been obvious”. [We are now entering stage three where the eventual bankruptcy of nations is becoming obvious to all. Let’s review the situation.] Words: 1091

So says Charles Sannat, Chargé d’affaires of BNP Paribas, in a translated version of his article* posted at www.goldcoin.org which Lorimer Wilson, editor of www.munKNEE.com,  has reformatted and edited […]  further for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Sannat goes on to say:

Stage One: Open Ridicule

Back in early 2007  all the elements of the crisis were already in place but those who saw the writing on the wall (i.e. the prophets who were casting doubt on the soundness and financial sustainability of large states) were called doom-mongerers, stupid pessimists who were incapable of imagining the power of interventions made by the monetary authorities and the central banks. [After all,] countries had relatively little debt and therefore sovereign debts were assets held as a priority.

Stage Two: Strong Opposition

Then came the great crisis of 2008 – the one needing billions of Euros and Dollars of stimulus, monetary creation and social expenditure… By the end of 2010, however, the idea of the widespread failure of  most western countries was only encountering soft opposition with people being heard to say something along the lines that “a country does not really go bankrupt, and anyway, growth is starting in the United States which is, after all, the world’s largest economy so what is there to worry about.” Really? Well, remember the figure of 2.9% which was the growth rate for the U.S. economy in 2010. Remember it well, we’ll come back to it.

How Do We Get Out Of the Current Crisis?

Despite the abovementioned 2.9%, unemployment did not fall at all. Some kill-joys who were looking at the real unemployment rate in the United States (the one published by the FED and which also records those looking for work but receiving no benefits) even dared to say that this figure had reached more than 17.4%. In addition, in spite of this 2.9% (growth), approximately 43 million Americans eat every day thanks to “Food Stamps” which are handed out to the poorest of society to enable them to go stores and buy basic items of food. It is a modern version of the soup kitchen that avoids shocking images of queues of the miserable and hungry unemployed. In short “food stamps” are a cross between ration books and restaurant vouchers.

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The British Situation

Our English friends had the brilliant idea of electing a new “Conservative” Prime Minister – one Mr. Cameron – who argued that “If you do not deal with the the debt, you will never grow”. His main opponent, the “Labour” Party leader, Ed Miliband, replied: “If you do not grow, you will never get out of the debt.” That’s a neat debate. How can we get out of this crisis? How do we get back to growth?

Should we spend more in stimulus measures to stimulate the economy as argued by our Labour friend? Sure, why not. Unfortunately, however, with 11% deficit it would be difficult for the UK to spend more without going immediately bankrupt so Mr. Cameron is exploring the only path which theoretically still holds out some hope – one of austerity – that would cut all spending – not a little, but very much. 490,000 civil servants could be laid off by2015;  tuition fees could be tripled, quadrupled or even quintupled; teachers could be laid off; parents would have to organise themselves to provide teaching for their children – and judging by how things are going over there, there will be no shortage of available parents in the coming months. Would such measures lead to “healthy” growth? The answer at this time is a resounding No!

Unofficially, the United Kingdom has double-dipped back into recession (there needs to be three months of negative growth before an economy can officially be considered to be in recession)… and a recession means a fall in tax revenue which, given that this revenue is to be used to pay the debts which have already reached monstrous levels, is not the best of news. In summary, therefore, heavy debts + recession = insolvency.

The American Situation

On Capitol Hill this week, Bernanke didn’t rule out expanding the so-called quantitative easing program.

The Americans have decided, unlike the British, to let deficits “spin” in order to stimulate growth – and it has worked generating  2.9% growth!  Hold on! At the risk of shattering a few wonderful hopes, it does not work. The reasons why not are as follows:

• The 2.9% growth represents a total increase in GDP of $541 billion U.S. .
• To create these $541 billion of new wealth the political and monetary authorities have created $1,700 billion in new debt or, to put it another way – for every $1 of growth, you need $3.14 of new debt.

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Therefore, we can make three observations:

1. The debt is growing faster than the wealth created with these new debts.
2. The global economy is no longer able to create growth without debt.
3. The outcome will inevitably be insolvency

Stage Three: Obvious Outcome

In 2011-2012, we return to the last stage of the truth according to Arthur Schopenhauer. The bankruptcy of countries will be “deemed to have been obvious.” The world will acknowledge the widespread insolvency of the Western nations. This will occur either because the stimulus will have created a debt which is too large or because austerity measures will have created excessive debt; the end result caused by the austerity plans is essentially the same when adjusted for social and human damage. Both routes lead us straight into insolvency.

Conclusion

Everyone can see that the stimulus approach is leading the U.S. to disaster. The austerity measures in the UK still have another 12-24 months to go before they show that they will not work any better either.

*http://goldcoin.org/gold/is-the-bankruptcy-of-nations-unavoidable/1417/

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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Sovereign insolvency