It seems all the economic geniuses out there are determined to have a spending, consumer led recovery. The reality is, this will not work. The reason we are in this mess in the first place was the “spending” on credit in ‘I want it all and I want it now’ generation. Almost all of the spending in the decade leading up to this “mess” we are in was done on credit. Few if any waited, saved or put off purchases until they had the money to pay for them (housing maybe an exception but with housing a hefty deposit is prudent). Instead, bombarded with sales and marketing gimmicks and aggressive “me too” type programs, consumers were led into making purchases under the guise of buy now or risk rising prices and pay more later. The “no payments due until 2 years hence” etc and the constant bombardment on TV touting gadgets, cars, TV’s, houses, appliances, holidays… you name it. Do it and do it NOW! And for the most part, consumers, like lambs to the slaughter did exactly that. Now what?
Here we are today steeped in this mess fuelled by the conspicuous consumption habits of the past and the economic giants are encouraging us to “spend”! THAT is what got us into this mess in the first place. This global recession we are in (let there be no doubt that we are in one) is going to be long and deep and wide. SPENDING today on the continued path of the past is going to make it worse. SPENDING now will make it more difficult to exit and probably make it deeper and prolonged. The reality is we are going to be in a recession (maybe even a depression along the lines of the 1930’s) so get ready for it and that does NOT mean spending; it means cutting back on spending and saving as much as you can, as quickly as you can. Reducing consumption, reducing your debt load and hunkering down for the recession.
I know the arguments the economic giants are saying; spending will give us a consumer led recovery. NOT this time. The confluence of factors in aggregate are too severe and too engrained to be resolved with “quick fixes”. It took a decade or longer to get into this “mess” and we are not going to get out of it quickly. If consumers stop spending and reduce debt, there will be consequences, some businesses will fail (some already are; the car giants etc) and others must pare back for the downturn and survival is the key for these businesses and SME’s not growth and not sustainability; SURVIVAL!
The banking system is in an unprecedented mess, and it will take years and years to correct, if ever and certainly NOT in their current form. Instead of the UK Treasury and the USA Fed pumping billions, hundreds of billions into failed and failing banks, they should be creating NEW banks that are clean, debt free, problem free and willing and able to lend. A portion of the $500 billion stimulus package could be injected into a NEW banking group with one clear mandate; to extend credit facilities to (worthy) borrowers; companies, SME’s, and individual borrowers who measure up to acceptable, stringent credit standards. And meanwhile, the banks’ that continue to haemorrage can be nursed through the crisis of “their own making” over many years and perhaps decades until they get back on some firm footing. It is totally senseless and a waste of money for the UK and US Governments to be pouring huge funds down the deep dark hole of the big banks’ because that capital is GONE! It will never come back and it will never be used constructively to build any business. IT is simply GONE! But the liability the Government Treasury’s incur in borrowing the money to pour down the deep dark hole will remain on the Government balance sheet as a “liability” which MUST be paid for, and by whom? By the lowly taxpayers and citizenry of course, who else?! This action to “spend” and stimulus packages being talked about far and wide WILL NOT WORK. It will only serve to make the whole thing worse, and what is EVEN WORSE if possible is that it will take five years of spending UNTIL the geniuses realise the error of their ways. When the penny finally drops and “they” realise, hey, this is not working, it will be way too late as the economies of the world will be very deep down and take much longer to recover from the mire, hence the “depression” we seem inevitably headed to.
We are on the brink right now, today; March 2009 of severe consequences of several Eastern European “Failed states”. The Western economies are borrowing heavily NOW to fund their many and various “stimulus packages” and there is little enough capital available for that leaving many emerging market countries and Eastern European countries “unable” to access the capital markets because all the credit has been offered to the better borrowers leaving NOTHING left for them. This will precipitate an economic collapse of several “failed states” which will have a snowball effect on others causing HUGE problems beyond the help of anyone including the IMF. I expect some Eastern European countries that are already hurting to start to fail and cascade into an unimaginable mess beyond expectation and will lead to considerable social unrest in pockets and may spread systematically across Europe. This will be an inevitable tragedy.
