Kohler: tipping towards a recession
by Alan Kohler
This was always the great danger for the post-GFC world: that debt-laden governments, led by the US, would have to start cutting fiscal deficits before their economies reached escape velocity.

America and Europe now seem to be sliding back into recession, and governments and central banks are powerless, forced by circumstance to consolidate, not stimulate. There is, in effect, the first synchronised global fiscal squeeze since 1980 happening at precisely the wrong time.

To save the world from another recession (not a double-dip — it’s too long since the last one) it comes down to whether the world’s businesses can look past the government debt morass and invest, and whether the banks are prepared to lend to them.

The irony is that whereas Europe is being forced to consolidate by nervous bond markets, America is doing it despite  enthusiastic bond market support for government debt.

The US 10-year bond yield sits at 2.6% this morning, a near record low, so there is no shortage of money available. No, the US is cutting government spending by 2% of GDP because a group of anti-government right-wing politicians gained control of the House of Representatives in last year’s mid-term elections and are now enforcing their “mandate” against a weakened and desperate president.

In Italy, on the other hand, the 10-year bond yield is above 6%, having fallen overnight because of a surprise rate cut in Switzerland. It had gone up 110 basis points in a month, putting immense pressure on the Berlusconi government. But last night the prime minister came out with platitudes rather than a plan, so last night’s rally in Italian bonds is likely to be short-lived.

Either way, governments are being forced to act on their deficits ahead of sustainable economic recovery. The only country able to cut its deficit painlessly is Australia: in the May budget Treasurer Wayne Swan forecast an increase in tax receipts equal to more than 2% of GDP without increasing taxes, a gift from China.

The debt ceiling debate in the United States — comprehensively lost by President Obama — has thrown the weakening economy into sharp relief. The news this morning is that the ISM services index fell back in July, against market expectations of a rise.

Previously, the ISM manufacturing index hit a two-year low, consumer spending fell for the first time in two years, GDP growth is slipping and the statisticians admitted they got the depth of the recession itself completely wrong.

Payrolls are now slipping and there is diminishing optimism that the unemployment rate will fall below 9% any time soon. In fact, according to the consultancy Challenger, announced job cuts surged 60% in July to a 16-month high.

Unlike in 2008, this is not yet a credit crisis caused by insolvent, frozen banks. It is a crisis of government, only partly due to the transfer of private sector debt into public hands through bank bailouts during the crisis of 2008.

For the countries now bloated with debt and having to cut spending — America, Greece, Italy, Spain, Ireland, Japan — the events of 2008 capped off a long history of fiscal ill-discipline, and merely brought forward the day of reckoning.

And spare a thought for investors in those countries: there are no safe havens paying a yield that is higher than inflation. Gold is at a record high this morning as investors rush into it and out of dollars, but it pays no interest at all. Cash is near zero everywhere and the only bonds that yield better than inflation are those you don’t want to buy.

Except in Australia, that is, where you can get 6.1% for 180 days in a AA-rated bank. Right now that looks a no-brainer.

S&P just downgraded the US debt.

Just sat down to the news tonight, China already issued out a warning to the US, to get their house in order, and secure their economy. Great, WWIII here we go.

The Tea Baggers from Meth-Lab USA are responsible for the credit downgrade. That's what happens when you let "grass root" religious, paranoid idiots get in office. They got a taste of flesh under Bush and like a zombie horde, they smell meat in D.C.

I blame Ayn Rand too

Interesting and to the point article on the WSJ this am:  http://online.wsj.com/article/SB10001424053111903480904576512501087811480.html?mod=WSJ_hp_mostpop_read

Salient points:
- The number of millionaires has declined 39% since 2007;
- As a consequence, the absolute tax dollars collected from those millionaires has declined 49%, to $178b;
- People with income of $1M or more are 0.2% of the tax payers but still pay 20% of total income tax;
- They earned 9.5% of the country's total income in 2009;
- People with income of $200k or more are 3% of tax filers but pay 50.1% of all income tax.  I.e., the top 3% of wage earners pay more than the bottom 97%....
- They earn 25% of the total income.

The Dutch economy has always had a large percentage involved in agricultural activities and this is true today, with vast industrial scale green houses growing exotic orchids, flowering plants, tomatoes, cucumbers and other vegetables. They are the third or fourth biggest exporter of agricultural products in the world. I don’t see any major heavy engineering manufacturing on the scale of the mighty powerhouse of Germany and I don’t see any evidence of a once proud manufacturing base that has declined on the scale of say the UK.

The Netherlands was a very small country population wise and still is, but punches significantly higher than its weight.

The one thing I can say, those involved in heavy engineering and manufacturing will double or treble their wages on the continent when compared to the UK.

A General Manager of a manufacturing facility in England is just another piece of unwanted dog-turd on the continent he or she will have respect equal to that of a doctor, accountant or lawyer. This is the way of it.

Anything that comes from The Economist I question, the debate is valid, I don’t think The Dutch Disease exists. The Economist would be better spending time on the causes and solutions to the wholesale destruction of the UK’s manufacturing base and ability to create real wealth.