Being a debtor in a crowd of debtors is one thing. Being a debtor in a crowd of people who are cutting back their spending is much more exposed and uncomfortable. That is where the US finds itself. At the G20 the US will talk of the need for unity. By which they will actually mean - the need for everyone to agree with what the US wants.
This isn't going to happen. China isn't going to agree, neither is Europe and not even GB is going to offer more than soothing but empty words. The communique will be thin to the point where the markets will find it hard not to sink further as a result.
It is not that the European policy is going to work while the US's is going to fail. They are both going to fail just in different ways. The US is now exposeed as a nation whose debts are out of control and whose deficit spending on stimulus has just not worked. There is no denying it now.
The sink hole of US financial ruin is real estate. The stats speak for themselves. Sales of existing homes fell 2%. That decline in rate of sales means it will now take 8.5 month to sell the backlog of unsold/foreclosed houses. 8.5 months just to sell off the glut. That is before any new houses come on the market. Sales of new houses are much worse. They fell 33% in May. This huge decline is because the Federal stimulus has expired. Builders have reacted to both these bits of news by cutting housing starts (building new houses) by 10% last month. Permits to build in the future declined by over 5%.
Far fewer people can afford to buy. Far fewer builders are building. Which means far fewer builders are finding employment. Without employment those people can't pay their own mortgages and are becoming the defaulters of the future.
Over all fewer people are paying their mortgage. There is a lake of people who have not now paid their mortgages for months going into over a year. The banks are letting them just not pay, rather than foreclose and have to admit to another asset vapourizing. As long as they are not declared the banks can pretend. No one wants that lake to burst its banks.
But a non performing loan doesn't just dissapear. Non performing loans accumulate and as they do the bank, or whoever owns the securitised loan, is NOT getting paid. Their flow of cash coming in, starts to dry up. Now any financial organization can carry a few non performing loans. But they can't carry hundreds of thousands, for years on end and especially can't when they are also leveraged. Being leveraged means that missing income is needed to pay some other debt in the pyramid of debts. Leverage means non-paying loans start a chain reaction of non-payments.
This is why the banks continue to need public cash - as simple cash flow to replace the cash that is no longer flowing from mortgages. They also need public cash because they cannot get loans for their own operations, when increasingly all they have to offer as collateral are non-performing loans. Thus interbank lending is drying up once again. For Greece, Spain and Portugal it HAS dried up.
Europe's failure might come from the failure of Greek, Spanish or Protuguese banks but even if it doesn't it WILL come from the failure of its austerity measures. At the moment talking about these measures is doing wonders for the Euro and the Pound. But talk is cheap.
What is already clear from the UK is that the fiction of austerity being fail is not going to be sustainable.
Austerity will NOT be fair. Not only will the burden of the tax increases fall on the poorer but the cuts when they come will fall ONLY on the poor.
The cuts will not be apparent until October ish. It is the cuts, not to be admitted till the Spending Review in the autumn, not the taxes outlined now, which will be the killer. The cuts, if implimented would put people on the streets. The Ministers will set targets. Talking about targetting the feckless and the cheats. But if it was easy to identify them we would have done so years ago. On the ground the reality will be having a target of cuts to make, and the front line will simply withdraw benefits both housing and unemployment in the usual blind, box-ticking formulaic way. 'Discretion' will bow down to target fulfillment.
THEN people will really find themselves cut off and some of them on the streets. OR as one branch of government cuts them off another, 'emergency' branch will have to step in and retrieve them. Who can say what will happen. A bit of both.
The result will be a slow but unstoppable ground swell of true unrest driven by desperation and parallel to it, a series of reluctant admissions, as figures leak out, that the austerity cuts and saving just aren't being achieved. But all this could take until well past Christmas. Giving the City time to draw another Christmas bonus and expensive holiday and politicians time for more prayers that the miraculous recovery will somehow materialize.
Either we will have a semi-police state enforcing true poverty and destitution as people are cut off from financial help, while still in the depths of a recession without any real hope of employment, OR we will have a collapse of the whole of our current policy of stupidity. The government would collapse along with its plans.
I personally fear the former outcome for what it would mean for the country I love, but think the latter outcome is more likely in the longer term.
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