VDT – About reality Financial and political reflections

Black Hole

Banks and other investors have abundance capital to invest. The interest rates are historical at a low level and the money supply is abundant. Despite the low return on and the abundance of capital the Western economies have not recovered from the recession that started in 2007 as a consequence of the huge mortgage fraud in the US. One should expect that with these low interest rates investments and economy would pick up; but that is not the case at all! 

The Euro-crisis is not helping to end the stagnation of economic growth, but this is not the primary cause for the glooming second worldwide recession. When there is abundance of capital available against very low interest rates and yet the economy refuses to pick up momentum than there must be an other cause.

In previous articles we argued and explained that the financial crisis, the Euro-crisis and the lack of economic growth find their origin in a gradual shift, over the past 30 years, to a (partial) consumption saturated society. Apart from money to invest, an investor also needs a market to sell his product. Economic growth can only be realized when markets grow and that implicates that demand has to grow too. Over the past decades the economic growth was financed by loans to consumers and countries. Instead of lending more money, after the crisis of 2007, to keep the economy growing investors stopped financing consumption because they begin to understand the risks! The growth of economies in the Western world has come to an end and production levels will be for the coming years at best at the 2007 level.

At best, because consumers and countries have to pay back loans and that puts the demand side of the economies structural below the 2007 level. The demand side of economies can be stimulated with government spending or consumer loans but the reverse is also possible and that is going to happen worldwide in 2012; fortified by higher unemployment and less spending due to decreasing return on investment.

The Dutch are more depressed about their financial future than ever before. This is even so while the Dutch economy, with low unemployment (5,8%) and low interest rates, is one of the healthiest economies in the world. The Dutch (intuitively) realize the good times have passed. Our economy is open and therefore 50% of our national product is from abroad where the economic prospects are worse. On top of that we have a liberal government that is simple minded and thinks the economic problems will be solved when the budget deficit is cut .

I wish it was that simple; but it is not! Furthermore 40% of Dutch pensioners will, apart that they are not compensated for inflation, see their pension cut up to 7%, because the financial reserves of the pension funds are not sufficient anymore. Private mortgage debt on houses is considered much too high, this is true, yet this debt increase kept the economy, on the demand side, going the past decades. The depressing low stock market prices are not helping either. There is no cure in our present economic system to solve the problem for a consumption saturated economy.

The crash of our economic system is imminent. When you ask some one: “Would you like to die sooner or later?” normally the answer is “later”, but politicians have decided for us that sooner is better. Look at the last Euro-top where it was decided that the budget deficit of any country cannot exceed 3% of GDP. This bureaucratic measurement will accelerate the downward economic process. The recession can only be avoided when government spending compensates for the structural consumption deficit of the higher income class in society.

The prospects for Europe are glooming, but for the US they are not better. When Obama wins the elections the deadlock on public spending will continue; the triangle President, Senate and Congress will see to that. When the republicans win, drastic government cutbacks are expected and the negative economic spiral of more cuts in government spending, more unemployment, less tax income, higher budget deficit, more drastic government cutbacks etc will accelerate the downturn.

Do not forget that the economic growth over the last 67 years was only possible because the working class gradually participated more and more in the wealth. That process is reversed! The difference between the low and high incomes has never been so great. The difference between poor and rich is even worse; the poor in the past had nothing, now they have debt!

Don't make the mistake to think that the positive economic spiral of the past 6 decades cannot change to a long term negative growth. Economics is a social science and should describe the human behavior in a changing economic and social environment. However mathematical models, incapable of describing the changing human behavior, determine economic policies instead of common sense and logic. All economic signals, worldwide are full red!

Governments and monetary authorities have proven, many, many times, they cannot control the economic process.