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HOMEMEDICINEFinance

Austerity 101 & Debt-Driven Death Spirals

Published on April 26, 2010

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When a government is forced to solve its debt problem by issuing more debt it knows the end is near. World leaders are not so stupid that they don’t know that if interest rates cannot be kept at their present historic lows the game will be up and their collective throats will be put in a noose to their regret. Sure low interest rates can be retained through lots of behind the scene wheeling and dealing but what is happening is simply not something that can go on forever. George Soros, speaking at a meeting organized by The Economist, warns all those who are throwing their money into the equity pit, that "the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis."

Not only is the United States living beyond its means, it is now borrowing beyond its means. – James Turk.

One thing is for sure is that sovereign debt problems are pushing up interest rates for all nations and that is going to come down hard on governments and everyone else. We are seeing lower debt ratings and it’s only a matter of time before the UK, US and Japan are cut. None of these countries are reining in spending. All are still big spenders but they will have to cut back, the only question is when? By the time this is over all nations will have to cut spending. If they do not their cost of borrowing will increase beyond the stratosphere where they already find themselves. Sucking hard on the real world economy debt servicing costs will bring about a deflationary collapse even if inflation continues to threaten.

We already know that massive layoffs are on the horizon for city and state workers across the United States. States, especially California, that are in financial crisis are opening up their prison doors. Budgets across the nation are in freefall and that’s not only deflationary, it’s devastating to a way of life that Americans simply got too used to. American society is going to be gutted right across its middle and exactly where it will hurt the most.

Germany’s Finance Minister Wolfgang Schaeuble warned Germans to prepare for drastic economic measures over the next few years to get control of public finances. Part of the solution to the problem of Germany’s budget deficit is "to reduce spending or else let it increase only very slightly," he said in the magazine Focus. Schaeuble said that 2011 will be "a difficult year but not yet the most difficult. The mechanism of reducing the debt will make life harder year after year.” Germany, one of the strongest economies in the world is counting on growth to generate jobs, boost tax revenues and refill the state’s coffers. Germany is recovering from its worst recession in more than six decades, with output shrinking by five percent in 2009.

Even a financially strong country like Germany is threatened unless it lets go of Greece and the rest of the PIGG nations because they would be taking on debt on somebody else’s behalf. It seems like there is a revolt and revulsion on the part of the German people’s part no matter what the officials say about saving the entire system from chaos. How do you think the German people are going to think about going further into debt to save Greeks? It might not be in fashion to abandon ones allegiances to the world system (right now) but  soon it’s going to be every man for himself, every family for themselves; and each country will have to look after its own interest despite the elites plan to bring everyone under one umbrella government.

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School districts around the country, forced to resort to drastic money-saving measures, are warning hundreds of thousands of teachers that their jobs may be eliminated in June.

But not quite yet for the IMF is here to save the day! The International Monetary Fund, on their official site, announced that they were preparing half a trillion dollars more in debt relief funds to their clients. Just a few bucks extra to keep the present shell game going a bit further. It’s not convenient to anyone for the world system to fall off a cliff this month or next or the one after that. Let’s just kick this whole mess down the road a little more so we can hope, or like Americans, go into another frenzy of spending even if it’s the mortgage payments we are not sending in that we use for funds. Europe might lend Greece 40 billion and the IMF more billions after that but what will be the result besides saving the system for a few months more (something most of us like)? It’s going to put the Greek people another fifty billion in the hole meaning it will be cash karma time, austerity of the most painful kind.

No one wants to accept the fact that debts that can’t be paid and won’t be because instead of growth and increasing tax revenues to service sovereign debt it’s going to be contraction and economic devastation and increasing interest (debt costs), which will throttle what’s left of the world financial system. Someone must bear the cost as debts go into default or are written down. Government debt in Greece is just the first in a series of European debt bombs that are exploding. Bankers in Sweden and Austria, Germany and Britain are about to discover that extending credit to nations that can’t (or won’t) pay may be their problem, not that of their debtors.

San Jose officials notified more than 1,300 city employees, including more than a sixth of the full-time work force, that they are likely to be laid off or moved to other jobs later this year.

The end of the fiat currency experiment is on the table with certain currencies threatened first like the Euro is now. But soon downward pressure will be applied to all paper currencies and that is when gold will shoot through the roof signaling the end of times for government debt, paper currencies and all the fancy financial products like derivatives and credit default swaps and a dozen others whose hundreds of trillions in value dwarf all the stars in the known universe.  This will begin in earnest as the world wakes up to the full implications of the institutionalized monetary abuse engendered by the world’s fiat systems, which have been cut off from the reality and discipline that gold brings.

Credit agencies are saying that the US, the UK, Germany, France, and Spain are walking a tightrope as they try to bring public finances under control without nipping recovery in the bud. "Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion," said Pierre Cailleteau. "We are not talking about revolution, but the severity of the crisis will force governments to make painful choices that expose weaknesses in society," he said.

According to a report on sovereign debt by Moody’s, the world’s five biggest AAA-rated countries (including the United States) are all at risk of soaring debt costs and will have to implement austerity plans that threaten "social cohesion". If Moody’s is warning that there is a realistic possibility that "social cohesion" in the United States may break down due to economic factors, perhaps we should all start listening.

Prof. Micheal Hudson, Chief Economic Advisor to the Reform Task Force Latvia said “Austerity plans IMF and EU style is an antiseptic, technocratic jargon for life-shortening and killing impact of gutting income, social services, spending on health on hospitals, education and other basic needs, and selling off public infrastructure for buyers to turn nations into “tollbooth economies” where everyone is obliged to pay access prices for roads, education, medical care and other costs of living and doing business that have long been subsidized by progressive taxation in North America and Western Europe.”

The age-old conflict-of-interest between creditors and debtors threatens to split Europe into opposing political camps. Political and economic alliances will shift, currencies will crumble and governments will fall. – Prof. Micheal Hudson

Hudson pointed out that even with British and Dutch bullying – 97% of Icelandic voters opposed the debt settlement that Britain and the Netherlands sought to force down their throats. Foreclosing banks can take possession of collateral real estate, but do not have any further claim on the mortgagees. This practice – grounded in common law – shows how North America has freed itself from the legacy of feudal-style creditor power and the debtors’ prisons that made earlier European debt laws so harsh. It seems unreasonable and unrealistic to expect that large sectors of the New European population can be made subject to salary garnishment throughout their lives, reducing them to a lifetime of debt peonage. It is not clear though how things will work out on a larger scale when the holders of American debt like China are faced with a default. Will they go to war?

Developed countries with big budget deficits must start now to prepare public opinion for the belt-tightening that will be needed starting next year now says the IMF. John Lipsky, the International Monetary Fund’s first deputy managing director, said the scale of the adjustment required was so vast that it would have to come through less-generous health and pension benefits, spending cuts and increased tax revenues. The IMF in their divine wisdom favors maintaining fiscal stimulus in 2010 in most advanced economies, but then the brakes need to be slammed on so it is being advised that governments should make it crystal clear to their citizens why a return to prudent policies is a necessary. The U.S. borrows and spends beyond its means and almost everyone realizes that tough policy choices must be made to avert disaster and now we have the IMF saying so out in the clear. States are already facing this and are increasing laying off workers that provide basic public services. Soon the federal government itself is going to be in the same situation but they will delay that day for as long as they can get away with borrowing money and taking on obligations that they can never pay back or honor.

IMF chief Dominique Strauss-Kahn said on Saturday that public debt in the advanced economies is set to increase significantly and reversing the rise would be a "tremendous" challenge. "Therefore, for the next decade or two, cyclical upswings should be used to reduce public debt, rather than finance expenditure increases or tax cuts. Moreover, the costs of the crisis — low growth, high unemployment and sharply higher public debt — will take many years to overcome," he said. Strauss-Kahn’s speech was disrupted by protestors, who climbed to the balcony above the screen by where he was standing and threw a banner that read: "IMF is part of the problem, not the solution."

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Dr. Mark Sircus AC., OMD, DM (P)

Director International Medical Veritas Association
Doctor of Oriental and Pastoral Medicine

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