“It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand,” IMF Managing Director Christine Lagarde said in prepared remarks before the German Council of Foreign Affairs in Berlin. “A moment, ultimately, leading to a downward spiral that could engulf the entire world,” she said.
The dire warning from the IMF’s top executive is designed to spur political action in Europe and within the Group of 20 industrialized and developing economies and avoid the political stagnation she said exacerbated the crisis.
Let’s look at the facts, shall we?
The situation facing Europe and indeed the developed world is much like a gambler who walks into the casino with a bankroll and sits down at the tables. He loses the first few hands but feels the “old alchemy”, and much like a drug addict he likes the rush that is produced, even as his stack starts to dwindle toward zero. This is akin go the first political promises made to give handouts to people that have no funding behind them.
As the stack in front of the gambler dwindles, however (and the political promises pile up debts) the level of desperation rises. Now euphoria is replaced by sweat. You see, the gambler came to the casino with the mortgage payment and electric bill as his stake, just as the IMF committed billions knowing that the entities involved in the game — in this case Greece — lied to get into the Euro and did so with the explicit support and participation of many of the world’s largest financial institutions.
So now, having lost the original bet, we have the doubling down. And the doubling down on the doubling down.
Anyone who has gambled knows how this ends — in bankruptcy. Oh sure, there’s the chance that you will pull off the big hand, that you will get back what you lost. It’s the nirvana that is always just around the corner, just one more hand, just one more pull of the slot machine handle, just one more hit off the crack pipe and you’ll stop….
There is no stopping other than by force, ladies and gentlemen, and that force needs to be applied to the neck of people like Christine Lagarde by the governments involved.
There is simply no other way.
You cannot solve a debt problem with more debt. You cannot resolve the issues that face the world economy with more borrowing and you cannot “grow out of it”, as mathematically you must either grow faster than the debt increases or shrink the debt faster than GDP decreases.
This is mathematical fact, not politics or policy.
Lagarde doesn’t want to talk about mathematics and she’s not alone. The rest of the developed world is likewise unwilling to face facts when it comes to the mathematical certainties that underpin what is going on in the economy on a global basis. The IMF states that “a collapse in demand” will lead to a global Depression (true) but refuses to admit that “demand” fueled by deficit spending is in fact false; it is “demand” that does not actually exist in the economy as a consequence of actions by people and is instead a reflection of “free stuff” being handed out by those governments.
But “free stuff” is never actually free. It is only a pull forward of demand into today from tomorrow. Then, when tomorrow comes, we do it again. And again. And again.
For how long can this continue? Can it contiunue forever, as people like Lagarde claim? Of course not.
Can we expect productivity and improvement in the economy to lessen and fix sovereign balance sheets? No, because the deficit spending has not stopped and nobody intends to stop it.
But until it does stop, and until the facts are faced there is no resolution, there is no adjustment in the general price level, there is no recognition that the people of these nations have lived at a standard of living that exceeds their ability to earn.
Until that changes — whether by choice or force — there is no resolution to the underlying problem, and thus all so-called “recoveries” will be both short-lived and false.