insanity

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What is Michael Heseltine Smoking?

In surely the nuttiest news of the day week month century, former British Deputy Prime Minister (an office of “great repute“) Lord Heseltine suggests that Britain will join the Euro.

From the Grauniad:

Britain will join the euro, Conservative peer Lord Heseltine has claimed. The former deputy prime minister, a long-time supporter of the single currency, said the public had “no idea” of the potential impact its collapse would have on the UK.

But he believes Franco-German “determination” will secure the euro’s future and pave the way for Britain to sign up. Lord Heseltine, who now heads up the government’s regional growth fund, told BBC1’s Politics Show on Sunday: “I think we will join the euro.

“I think the chances are the euro will survive because the determination, particularly of the French and the Germans, is to maintain the coherence that they have created in Europe.”

The problem is that there is no coherence. Nobody is really in charge — not van Rumpuy, nor Barroso, nor Draghi, nor Merkel, nor Sarkozy. The thing is a total hodgepodge, a hyper-bureaucratic, hyper-leveraged mess. Nations were free to borrow and spend as much as they liked — without the ability to monetise debt, and without any real lender of last resort or safety net. Europe has no coherent political or decision-making structure, no single culture of work, no single language and little workforce mobility.

The idea of Britain giving up its monetary independence (and thereby — as Greece is discovering — fiscal independence) to such an incoherent, bureaucratic and anti-democratic cabal is absurd and dangerous.

I suppose there is one kind of coherence in Europe, though.

Goldman Sachs has a finger in every pie and a minister or central banker in (almost) every government. And — as Papandreou discovered, when he suggested Greece hold a referendum on austerity — if you don’t play ball with Goldman Sachs and the cult of international finance, you are quickly disposed of and replaced by a Goldman-endorsed technocrat.

From the Independent:

Fortunately for Europe (and the world) Goldman’s 21st-Century-Schizoid loot-and-pillage hyper-fragile economic model doesn’t offer any kind of long-term prosperity, and is bound to fail. Japan — and more recently, America — is ample evidence for that. Bailing out zombie financial institutions, piling on more debt, and preventing liquidation just tends to lead to the stagnation and zombification of the wider economy.

Certainly, with European sovereign debt now in a Lehmanesque downward spiral (demand collapse) there is no chance of Britain joining the Euro. But the end of the Euro in its current form does not necessarily the end of this mess.

How much productivity, industry, opportunity and wealth will be destroyed by the cult of financialism, hyper-leverage, endless centralisation and no-haircut-bailouts? No-one knows.

The real question is what long-term damage has been done to liberal capitalism as a political and economic system?

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The Biggest Bubble in History

Regular readers will be aware that I believe that American government debt (and by extension, cash) is in a once-in-a-century bubble.

A recent article from Bloomberg typified this ongoing (and quite hilarious) insanity:

The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.
Fixed-income investments advanced 6.25 percent this year, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.

The combination of a core U.S. inflation rate that has averaged 1.5 percent this year, the Federal Reserve’s decision to keep its target interest rate for overnight loans between banks near zero through 2013, slower economic growth and the highest savings rate since the global credit crisis have made bonds the best assets to own this year. Not only have bonds knocked stocks from their perch as the dominant long-term investment, their returns proved everyone from Bill Gross to Meredith Whitney and Nassim Nicholas Taleb wrong.

"I CAN'T SEE A WOOD?! ALL I SEE ARE TREES!"

When will the bond bubble end? It will end when the people and governments of the world tire of giving their pound of flesh to creditors. Creditors and debtors have fundamentally hostile interests — debtors want to take money without paying it back, and creditors want to take value without getting their hands dirty. A history of the world (the decline of Rome, the decline of Britain, the decline of America) is in some ways a history of hostility between creditors and debtors.

This hostility has been tempered (and conflict delayed) since the Keynesian revolution, by mass money printing. Everyone (except savers) wins — creditors get their pound of flesh (devalued by money printing), and debtors get the value of their debt cut by persistent inflation.

But there is an unwanted side-effect. Debt mounts & mounts:

And eventually, debt repayment means that “kicking the can” becomes “kicking a giant mountain of debt” — a very painful experience that necessitates either painful austerity, or huge money printing — neither of which encourage savings, or investment.

Europe, on the other hand, has decided to skip the can-kicking (“price stability, ja?“) and jump straight to the cataclysm of crushing austerity for debtor nations. Unsurprisingly, Greeks don’t like being told what they can and cannot spend money on. Surprisingly, the Greek establishment have decided to give the Greek people (debtors) a referendum on that pound of flesh Greece’s creditors (the global banking system) are so hungry for. Default — and systemic collapse — seems inevitable.

(UPDATE: Greece, of course, has undergone a Euro-coup and is now firmly under the control of pro-European technocrats — creditors will get their pound of flesh, and Greece will get austerity)

Some would say Europe has forgotten the lessons of Keynes — print money, kick the can, hope for the best. But really, the Europeans have just hastened the inevitable endgame every debtor nation faces. With a mountain of external debt crushing organic growth the fundamental choice is default, or default-by-debasement. That’s it.

And that is why, however elegantly America massages its problems, American government bonds are in a humungous bubble.